For months I voiced heavy skepticism that Shinzo Abe's new administration would follow through on its plans for huge economic policy changes - in particular, a serious push for reflation. Yesterday, Abe's new central bank chief, Haruhiko Kuroda, proved me wrong by announcing a dramatic new program of quantitative easing:
The Bank will achieve the price stability target of 2 percent in terms of the year-on-year rate of change in the consumer price index (CPI) at the earliest possible time, with a time horizon of about two years. In order to do so, it will enter a new phase of monetary easing both in terms of quantity and quality. It will double the monetary base and the amounts outstanding of Japanese government bonds (JGBs) as well as exchange-traded funds (ETFs) in two years, and more than double the average remaining maturity of JGB purchases...
With a view to pursuing quantitative monetary easing, the main operating target for money market operations is changed from the uncollateralized overnight call rate to the monetary base...The Bank of Japan will conduct money market operations so that the monetary base will increase at an annual pace of about 60-70 trillion yen...
With a view to encouraging a further decline in interest rates across the yield curve, the Bank will purchase JGBs so that their amount outstanding will increase at an annual pace of about 50 trillion yen...
With a view to lowering risk premia of asset prices, the Bank will purchase ETFs and Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at an annual pace of 1 trillion yen and 30 billion yen respectively...
The Bank will continue with the quantitative and qualitative monetary easing, aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner...
Note that "price stability target" means inflation target.
Now, 60-70 trillion yen is about $600-700 billion, which is about the size of America's recent "QE1" and "QE2". Japan will basically do an new "QEx" every year. In addition to buying long-term government bonds (which the Fed did in QE2), Japan's central bank is going to buy stock and real estate. This is exactly the sort of reflationary policy that Miles Kimball recommended as a cure for depressions, back when I took his macro class. In any case, the move is very very big. George Soros says that the BOJ's plan is "three times as big" as the Fed's attempts at QE. People from big banks and research companies are saying much the same thing.
Anyway, so Abe defied my expectations and really implemented a serious policy change. Now, we get to see how well monetary policy really works, in an economy with a deflationary trap and well-anchored deflationary expectations. A dramatic (though uncontrolled) natural macroeconomic experiment is being carried out in Japan - probably the biggest thing since Volcker whipped U.S. inflation in the early 80s.
IF monetary policy works - i.e. if it can raise inflation in a controlled manner while boosting output - it's not only a huge win for Japan - which needs moderate inflation to erode its mountainous debt, and could probably use an employment boost too - but also for New Keynesian and monetarist type macroeconomics, which generally holds that a central bank has the tools to control the rate of inflation (or to beat any depression). A failure would mean either an uncontrolled "inflation snap-up", or a failure to budge Japanese expectations and prices. A majority or plurality of top macroeconomists probably believes in some sort of monetarism, so hopes are high. I'm a little bit more agnostic, and I'm excited to see what happens.
So, Mr. Abe (or "Shinzo" as I somewhat cheekily called him in a recent interview on a Japanese website)...you convinced me. Excellent job. Now let's see if you can convince me again with structural reform and the TPP!
Do you believe this will be "enough" to accomplish its goals? If it does not increase output without inflation, how will your understanding of economics change?
ReplyDeleteAnyone who thinks it will not work should make a similar statement too. If it does boost output without inflation, how will opponents change their stance?
If both sides do that now, there will be no backing out in a few years.
It will not work . I truly believe that the big crash will start with Japan and then will spread to US and the rest will follow. Who is going to buy US debt if Japan is out of the picture? They are big buyers.What will happen to US debt then? Bernanke will have to print more money.This is how it begins.
Delete"It will not work" ?? Looking forward to seeing you eat your words, mate.
DeleteWhy would Japan be "out of the picture?" Is it going to sink into the ocean?
DeleteA cheaper Yen means more Japanese exports, which means Japan likely holds a current account surplus vs. the United States...which must lead to them buying our bonds.
I don't understand how people insinuate whole countries will blow up and disappear because of economic difficulties or a recession.
How is the Fed and now BoJ going to unwind their balance sheets, once they have met their targets? What if interest rates spike, and the central banks become insolvent? Does it matter? Do they just break the accounting rules and carry on?
ReplyDeleteHow does a central bank with the power to create money become insolvent?
DeleteOnce they break their targets and they don't have such power anymore. It's all about credibility and expectations.
DeleteThe central bank can sell of the ETF's and bonds it has bought. It can increase the interest rates as well when the inflation is to high. This will decrease the monetary base and inflation will be lowered again.
DeleteI think that you have confused creating money with borrowing it (issuing bonds). The BoJ, like the Fed, will be buying bonds and earning interest. Unwinding QE would consist of selling the bonds back into the market and collecting the money, thus shrinking the monetary base. There is nothing here that could result in the central bank becoming insolvent.
DeleteIf interest rates spike, debt payments would put pressure on government budgets, not the central banks.
What if interest rates don't spike? What if real interest rates fall or at least don't spike? What if the BoJ on the verge of becoming insolvent prints a trillion to increase its capital?
ReplyDeleteWhat if BoJ does not need to wholly unwind its balance sheet,
- as both real and nominal income growth justify a higher level of monetary base?
- as a depreciated currency increases the demand for Yen (in order to buy assets on the expectation that the currency will appreciate in the future from its depressed levels)?
- as the BoJ increases bank reserve requirements and M2 for a given M1?
Thankyou for your thoughts
Interesting thoughts. But what about the price of consumer staples and energy?
Delete"... What if the BoJ on the verge of becoming insolvent prints a trillion to increase its capital? ..."
Delete"Printing" is a liability, NOT equity capital, for the central bank
I had a feeling this wasn't all just talk...
ReplyDeleteWhat I don't get is, how is this not going to affect the government's interest rates for lending? Once inflation expectations set in, people are going to demand a much higher yield.
But the near-0 interest rates are the only reason the government has been able to borrow so much. Half the budget goes toward debt repayment as it is. Add to that the fact that it's the elderly that have been doing all this heroic saving the past few decades, and that they're finally starting to dip into those savings now that they're reaching retirement, and the younger generation (aside from being smaller), earns less and has less to save. Far fewer bonuses to bank.
Put all that together, and it looks like a surefire collapse of the yen, and maybe not even all that far from now. Possibly in the next 5 years, almost certainly in the next 15-20. People keep saying it hasn't happened yet, but that's because the above hasn't kicked in yet. But it will. The new generation isn't (and can't) do enough zero-interest saving to keep this up.
2% inflation.
DeleteTherefore, savers are doomed, Japan is doomed, and we are all doomed.
Makes sense...
That's cute, but the above has nothing to do with inflation eroding people's savings.
DeleteThe rest will happen even if inflation stays at 0.
The theory is that the growth which will accompany the inflation will generate more than sufficient revenues to pay the higher yields while shrinking the size of debt relative to GDP.
DeleteWhat you seem to be saying is that QE won't generate growth. That is contradicted by your assertion that the retired are turning from saving to spending. The young may earn less, spend less and save more, but ostensibly more of them will be earning.
>"What you seem to be saying is that QE won't generate growth."
DeleteIt's very much still an open question whether or not it will generate growth- a lot of people doubt it will even generate substantial inflation.
That remains to be seen, but even if it's relatively successful, then it becomes a matter of whether or not the growth can compensate for a very dramatic demographic shift. Japan's increases in productivity have already been quite good the past 20 years, but the population is shrinking at such a rate that GDP hasn't increased so much.
Those demographic trends are accelerating. Abenomics will have to generate a hell of a lot of growth just to compensate for them, let alone grow the economy at a respectable rate. In 25 years, Japan's population will be 16% down from what it is now, and 30% of the population will be over 65 and leaving the workforce.
>"That is contradicted by your assertion that the retired are turning from saving to spending."
The reason the elderly are turning from saving to spending is because they're retired now, and are no longer generating any income themselves. There's no growth to stimulate with the emerging largest demographic because they're leaving the workforce.
They're living off the saving they've accumulated, and heightening their burden to the state by way social security and health care. Which is to say they're simultaneously depleting their savings *and* spending less.
Did the BOJ not have an explicit inflation target before? Could this be considered a delayed response to the fact that the Fed recently adopted explicit inflation targets?
ReplyDelete>Did the BOJ not have an explicit inflation target before?
DeleteBarely. I remember a year or so ago the BoJ Governor was talking about maybe committing to 1%, but it was a very tentative, down-the-road kind of thing.
On the other hand, the new BoJ governor and deputy have been saying Japan should set an inflation target like this for years and years now. Abe listened to them.
Noah:
ReplyDelete1. Someone, whether Abe or an adviser, has suddenly discovered a backbone and come to understand what it means to be a leader. Abe is trying to create confidence and vision, i.e., change reality.
2. Whether he prevails or not will depend on how much Japan can increase exports with this effort and whether he can create a real current account surplus by cutting prices.
This is nothing but a currency devaluation in another name.
Now is the time to look at buying Japanese cars, TVs, and other similar products.
3. All the what about savers bs. This simple, it is not possible to have one's cake and eat it too---the paradox of thrift.
4. Miles has forgotten what he taught you.
5. Beyond that, use any of the following, freely, to describe his critics. "Pusillanimous pussyfooters", "nattering nabobs of negativism" (written by Safire), and "hopeless, hysterical hypochondriacs of history". He once described a group of opponents as "an effete corps of impudent snobs who characterize themselves as intellectuals."
6. Last, and most importantly, any increased economic activity in Japan will mean fewer jobs here. We are the only place big enough to buy what Abe is hoping to sell.
This is why Keynes was so right.
The deficits need to be in China, large enough to end its current account surplus. Until that happens the world has no choice but to follow buggar thy neighbor policies, for re-balancing is not possible.
7. Question---had should Obama react?
Agree on all but 6. Obviously, competitive devaluation gets everyone back to where they started, but with higher inflation if the devaluation is attempted by increasing monetary base. This is a win for everyone in a deflation! It's possible to have both more jobs in Japan and more jobs here as Japan helps us reflate.
DeleteIt's not clear to me why Abe's fiscal policy is not mentioned? Not too shaby a percent of GDP, and more interestingly, starkly on it's own among developed world countries the rest of whom are still implementing fiscal austerity.
ReplyDeleteKervick?
DeleteI like how you associate New Keynesianism with Monetarism. Accurate.
ReplyDeleteHaha thanks, but this is pretty universally known. New Keynesian models are really much more Friedmanite, or Wicksellian, or Fisherian, than Keynesian. The Krugman-type ZLB models are a bit more Keynesian in that they allow stimulus to work, but really, still basically Fisherian in that sticky prices and sticky wages are the main things holding down demand.
DeleteBut I am no expert on this...Brad DeLong is the guy to ask!
If this works, can we happily agree that the European Central Bank and FED (to a lesser degree) behaved like raging morons who didn't read their Friedman? And that progressives (Krugman above all) were a force of evil in pushing for more fiscal stimulus when monetary policy would be enough (and less controversial)?
ReplyDelete>And that progressives (Krugman above all) were a force of evil in pushing for more fiscal stimulus when monetary policy would be enough (and less controversial)?
DeleteNo. First because Abe's (also big) fiscal stimulus is a confounding variable. But second because Krugman has been pushing for Japan to get out of their rut by making a credible promise of high inflation for some time now.
http://www.pkarchive.org/japan/liquid.html
And that's precisely what the BoJ is doing by setting this inflation target.
No you were are wrong "Anonymous." Krugman has said more monetary policy was worth a try. He has written about inflation expectations.
DeleteHe hasn't pushed it with the fervor of Sumner, but fiscal and monetary policy aren't mutually exclusive. To me the monetarists look petty when they insult potential allies.
Anonymous, no worries it won't work. Only fiscal stimulus can work. Switching bonds into reserves is immaterial from the point of view of banks.
DeleteThey already tried that, we tried that, didn't work.
http://www.dailypaul.com/279537/how-banking-actually-works-in-fiat-world
http://www.dailypaul.com/279972/how-banking-actually-works-in-fiat-world...
http://bilbo.economicoutlook.net/blog/?p=6624
"And that's precisely what the BoJ is doing by setting this inflation target."
ReplyDeleteAnd that's precisely what Krugman wasn't pushing for back in 2008. Some people are malicious enough to suspect that this "selective forgetting" was politically convenient.
That link is from far before 2008. Krugman was writing papers about how Japan should do this as far back as the late 90's.
ReplyDeleteAnd fiscal and monetary policy advocation isn't mutually exclusive. Here he is in 2010 saying a high inflation target is necessary-
http://krugman.blogs.nytimes.com/2010/11/02/why-inflation-targets-need-to-be-high-wonkish/
there are probably earlier examples too.
From what I saw a main reason he didn't push for long-term inflation promises for the US when the time came is because it would be politically suicidal, to the point it wasn't even worth bringing up as a feasible option. It's one thing to call for that policy in a far away land, another to take heat from your constituents when it comes about. Case in point: Bernanke wrote a paper proposing the very same thing for Japan. But when faced with the same situation at home and the power to enact it, he balked. Republicans were calling for his head as it was.
Luckily for Abe he's the only game in town right now.
"That link is from far before 2008"
DeleteThat's exactly why cynics call it "SELECTIVE forgetting".
He didn't selectively forget it. Here he is in 2009 explaining why he pushed fiscal, despite the fact he also saw inflation targeting as the best way to do it in a perfect world:
Deletehttp://krugman.blogs.nytimes.com/2009/11/13/its-the-stupidity-economy/
>"The first-best answer — that is, the answer that economic models, like my old Japan’s trap analysis, suggest would be optimal — would be to credibly commit to higher inflation, so as to reduce real interest rates...[but] to make this policy work you have to (i) convince current policymakers that it’s the right answer (ii) Make that argument persuasive enough that it will guide the actions of future policymakers (iii) Convince investors, consumers, and firms that you have in fact achieved (i) and (ii)."
>"In reality, we haven’t even gotten anywhere near (i): the conventional wisdom is still that any rise in expected inflation above 2 percent is a bad thing, when it’s actually good."
>"So some readers have asked why I’m not making the same arguments for America now that I was making for Japan a decade ago. The answer is that I don’t think I’ll get anywhere, at least not until or unless the slump goes on for a long time."
>"OK, so what’s next? The second-best answer would be a really big fiscal expansion, sufficient to mostly close the output gap. The economic case for doing that is really clear. But Washington is caught up in deficit phobia, and there doesn’t seem to be any chance of getting a big enough push."
>"That’s why, at this point, I’m turning to what I understand perfectly well to be a third-best solution: subsidizing jobs and promoting work-sharing. Call it constrained optimization, where the constraint comes from the power of bad ideas."
Are we reading the same article? Krugman is addressing criticism by readers who were wondering why he wasn't pushing for more monetary stimulus.
Delete"So some readers have asked why I’m not making the same arguments for America now that I was making for Japan a decade ago."
He is trying to JUSTIFY this "apparent" omission, explaining that it is a political nonstarter (well, a fiscal stimulus three times bigger also was, but it didn't stop Krugman, dit it?). Why are you trying to defend Krugman from something he himself acknowledges as true?
>"Krugman is addressing criticism by readers who were wondering why he wasn't pushing for more monetary stimulus. "
DeleteOr to put it another way, explaining why he didn't advocate it because people asked him. As for political feasibility, borrowing money at near-zero interest rates (even a lot of it) to pay for roads and high-speed trains is always going to be less objectionable to voters than steadily raising prices 4% on them every year for the indefinite future, particularly in a recession. So it can hardly be said it's a likely story.
Your point about the feasibility of monetary policy vis a vis fiscal policy is an empirical question. We've seen swings of monetary policy much bigger than what would be a prosaic adoption of a 4% inflation target (think of the Volcker recession). We've never seen fiscal stimulus of the size required by Krugman (much greater than US$ 800 billion) apart from emergency government spending in times of global war!
Delete>We've seen swings of monetary policy much bigger than what would be a prosaic adoption of a 4% inflation target (think of the Volcker recession).
DeleteYeah...extremely unpopular with the public, and got Carter thrown out of office. Not a big stretch to think building bullet trains across the eastern seaboard would go over better.
Why do you think you were wrong? You didn't explain. I remember disagreeing with you even though you clamied some expertise in things Japanese.
ReplyDelete"A majority or plurality of top macroeconomists probably believes in some sort of monetarism, so hopes are high. I'm a little bit more agnostic,"
Is this why? Sumner was skeptical it would happen as well let's remember. Of course he doesn't share Noah's good sense to admit that he was wrong. Instead he gripes about the "popular kids." The ego on that guy.
Peter: "Why do you think you [Noah] were wrong?"
DeleteNoah: "If Abe follows through on his radical monetary proposals, I'll gladly eat crow."
I took it that Noah believed Abe was a conservative hack. He made the analogy that Abe was like Republicans here in the states, specifically Paul Ryan. Ergo, Abe didn't believe what he was saying. Krugman disagreed with him on this: Abe's politics don't matter. Noah could have been right but wasn't.
DeleteIt just seemed like Smith didn't really ponder why he was wrong in this instance.
And it's a bit odd for him to be surprised at this timing. It's Kuroda, not Abe, who implemented the monetary policy change. Abe's last move on monetary policy was to appoint Kuroda as new BOJ governor. Yet Noah was still skeptical about Abe even after the appointment; see http://noahpinionblog.blogspot.jp/2013/03/how-is-abenomics-doing.html. And as he pointed out there as well as in this post, it's still not certain whether Japan can shrug off deflation.
DeleteAnd it's a bit odd for him to be surprised at this timing. It's Kuroda, not Abe, who implemented the monetary policy change. Abe's last move on monetary policy was to appoint Kuroda as new BOJ governor. Yet Noah was still skeptical about Abe even after the appointment
DeleteTrue! But I'm HIGHLY skeptical of the BOJ's independence, especially since Abe himself has talked about revoking it. I had thought that conservative 財務省 people would block any really radical thing that Kuroda wanted to do.
If you're going to write things with this tone:
ReplyDelete"Also, I've cast doubt on the idea that Shinzo Abe, the current hero of the Japanese "reflationist" camp, is really committed to following through on the radical changes he's proposed."
you need to be right otherwise you don't come off too well. Abe isn't our "hero." We're hoping he succeeds and think he can. If you don't think he will succeed, isn't it just a waste of time and energy. I guess it would be worthwhile if our "hero" was proven wrong.
A lot of Japan observers (myself included) have been extremely reluctant to accept Abenomics as a credible thing because we know the LDP's penchant for pork and institutionalized ties to special interests.
DeleteBut it's time to give the guy his due. The stimulus may heavily favor LDP donors in the construction industry and his nationalist policies might be infuriating, but he's clearly trying to make a genuine go of this inflation targeting thing.
"A dramatic (though uncontrolled) natural macroeconomic experiment is being carried out in Japan - probably the biggest thing since Volcker whipped U.S. inflation in the early 80s.'
ReplyDeleteA better analogy would be when Greenspan held rates low in the late 90s and unemployment reached 4 percent. That was an experiment where yet again the usual suspect were proven wrong.
My guess is that Greenspan did it not out of the kindess of his Randian heart, but because he was fighting international financial crises and the numbers didn't show any inflation.
Noah,
ReplyDelete"it's not only a huge win for Japan... but also for New Keynesian and monetarist type macroeconomics, which generally holds that a central bank has the tools to control the rate of inflation (or to beat any depression)"
Monetarist and NK macro definitely don't have the same perspective on CB omnipotence. The NK CB is only powerful at the ZLB to the extent that:
1) it can make credible commitments about its own future actions, even when those actions will be suboptimal in the future;
2) interest rates aren't already at zero all the way out the relevant portion of the curve. The relevant portion, in general, is less than ten years, the part of the term structure in which almost all of the real economy funds itself.
The NK model at the ZLB, works via commitment, and with the 10yr bond at 50bps there isn't very much of use that the BoJ can credibly commit to.
*ANYWAYS*
The current announcement WASN'T EVEN ABOUT forward guidance. It was about QE and targeted asset purchases. Neither of these have any support from the NK model, but QE specifically, is completely rejected by NK theory. That's the whole point of the liquidity trap.
And, claims by Scott Sumner notwithstanding, the market totally rejected monetarism once again with this announcement. The stock market was up by a pathetic 2%, likely as a response to possible stock purchases, and after adjusting for the 3% decline in the Yen, was down 1% in real terms. And most critically: TIPS break-even inflation was flat, or if anything, *lower* by a basis point or two. The market evidence for any positive effect of this action is absolutely zero.
And the scale of the rejection of monetarism is staggering. An announced *doubling* of the money supply, and zero detectable rise in expected inflation!
Markets rejected monetarism?
Deletehttp://www.reuters.com/article/2013/04/04/us-japan-economy-boj-idUSBRE93216U20130404
Government bond futures soared and the benchmark 10-year bond yield hit 0.425 percent, its lowest ever. The yen, which had been creeping up in the run-up to the meeting, plunged, driving the dollar up by more than 2 percent to around 95.25 yen from around 92.90 before the decision.
The Nikkei stock index unwound losses of more than 2 percent to end up 2.2 percent, just shy of a 4-1/2 year closing high hit last month.
Anonymous,
ReplyDelete"Markets rejected monetarism?"
Yes.
The rally in bonds and stocks is evidence that *targeted asset purchases* raise the price of the *targeted assets*. The drop of the Yen is a direct result of the drop in bond yields and uncovered interest parity. That has nothing to do with the money supply. Those effect would have occurred whether they were planning to swap the targeted assets for t-bills or for base money. I.e. they are portfolio balance effects.
I didn't say targeted asset purchases can't work. What I said is that if the monetarist mechanism had *anything* to do with it, inflation expectations would have to rise. They emphatically did not.
"which needs moderate inflation to erode its mountainous debt"
ReplyDeleteAre we talking about public or private debt here?
My understanding is that 95% of Japanese public debt is owned by the Japanese public, and that the Japanese retirement system is based on government bonds purchased by workers over the course of their work lives. So in Japan, public debt is a mechanism of intra-Japan wealth transfer, and the overall size of the debt is not so much different than other countries - but appears larger because government "obligations" to retirees in other countries are not classified as part of the public debt. Eroding the real size of the debt obligation also means eroding the real size of that transfer. Maybe that's a good thing; maybe that's a bad thing. But if a county's public debt is mainly a single nation affair, I don't think it makes much sense to worry about the debt as a special problem per se, but is only an issue with respect to the transfer patterns it generates. That's where the focus should be.
I don't believe household or non-financial commercial debt in Japan is terrifically high.
Are we talking about public or private debt here
ReplyDeletePublic debt.
My understanding is that 95% of Japanese public debt is owned by the Japanese public
Correct. Or something around that.
and that the Japanese retirement system is based on government bonds purchased by workers over the course of their work lives.
Not sure. There is a govt. pension system in Japan similar to Social Security. In addition to that, many Japanese people have corporate pensions and/or private savings accounts. Many individual investors are invested in JGBs, and most corporate pension funds own lots of JGBs.
So in Japan, public debt is a mechanism of intra-Japan wealth transfer,
Yes. The problem is that A) the wealth transfer is from the young to the old, and B) the wealth transfer is run through the government, which puts constraints on what the government can do (b/c it has to meet interest payments, which are high even though rates are low, given the sheer size of the debt).
the overall size of the debt is not so much different than other countries
Not sure what you mean by "overall size"...
But if a county's public debt is mainly a single nation affair, I don't think it makes much sense to worry about the debt as a special problem per se, but is only an issue with respect to the transfer patterns it generates. That's where the focus should be.
Mostly agreed. In my interview on Japanese TV, I presented inflation as a transfer from the old to the young. Ikeda Nobuo, who did the interview, agreed.
Now, there can be problems with the size of govt. debt if interest rates rise. Interest rates will face upward pressure if Japanese households, banks, and pension funds start moving money overseas, or if savings rates fall dramatically (as they have already done at the household level but have not done at the corporate level). If that happens, the central bank will have to pick up the slack to prevent interest rates from rising, by increasing asset purchases.
Noah,
ReplyDeleteThat could be very good for Guam's economy, which is heavily reliant on Japanese tourism. It seems that on the whole, a weaker yen has less impact on Guam's tourism numbers than the economic activity it tends to generate. This may partially offset the wrong-headed Sequestration for Guam.
Skills Upgradadtion...
ReplyDeleteWhat is TPP?
ReplyDeleteQE for the individual is the correct strategy. The only reason it is not considered so is that it will REDUCE borrowing and the CONTROL of the Financial "industry."
ReplyDeleteYes, this is exciting. If for no other reason than to close (one way or the other) an escape hatch:
ReplyDeleteKeynesians -- We didn't spend enough (US).
Austerians -- We didn't cut enough (Eurozone).
Monetarists -- We didn't QE enough (Japan).
"It's not only a huge win for Japan - which needs moderate inflation to erode its mountainous debt, and could probably use an employment boost too - but also for New Keynesian and monetarist type macroeconomics, which generally holds that a central bank has the tools to control the rate of inflation (or to beat any depression). A failure would mean either an uncontrolled "inflation snap-up", or a failure to budge Japanese expectations and prices. A majority or plurality of top macroeconomists probably believes in some sort of monetarism, so hopes are high. I'm a little bit more agnostic, and I'm excited to see what happens."
ReplyDeleteSo... we should have vote for Romney? for his new keynesian advisor fan of Friedman Greg Mankiw?
blah........
Noah,
ReplyDeleteDoes it make any difference that the deflationary wind that blew in with the emergence of China as the world's factory seems now to be fading? I wonder if this is the right policy, but too late.
Besides exporters, who wins and who loses in Japan from this policy? Obviously Japan has energy cost issues and a huge number of pensioners, and there isn't a huge unemployment problem, so why is this policy the right one now?
Does it make any difference that the deflationary wind that blew in with the emergence of China as the world's factory seems now to be fading? I wonder if this is the right policy, but too late.
DeleteI think this might matter a lot! But if so, it matters in a good way, since it'll help Japan break out of its deflationary trap.
Besides exporters, who wins and who loses in Japan from this policy?
If they can cause moderate inflation, young people win at the expense of old people (another reason I like the policy; maybe even the main one!)...
I would agree if you mean it would benefit those with variable as opposed to fixed incomes, as I'm sure is your point, but don't you think that real yields would tend to increase if the CBJ is able to deliver on its promise?
DeleteJapanese government paying money to the rich, whilst taking it from the poor through increased consumption tax.
DeleteI think it is pretty clear who will benefit from these policies.(Hint, not the ordinary workers still facing pay cuts.)
Looks like Japan will get hyperinflation first. In any case, I am sure it is worth spending some time to understand hyperinflation.
ReplyDeleteI have a Hyperinflation FAQ:
http://howfiatdies.blogspot.com/2012/10/faq-for-hyperinflation-skeptics.html
Also, a model and simulation of hyperinflation:
http://howfiatdies.blogspot.com/2013/03/simulating-hyperinflation.html
>will get hyperinflation first
DeleteLOL
"No wage inflation, no inflation"
Japan is running its macro economy roughly in balance -- they've seen a trade deficit appear, but that's why they want to push the yen down from 80 to 120 or whatever.
Where the yen ends up after all of this is the critical question, not interest rates, not "inflation".
Japan can feed and manufacture what it needs, so it doesn't need to fear inflation per se.
And it needs the soft-protectionism of a cheaper currency to bring more jobs back from E Asia.
Its baby boom is tiny compared to ours (~10M vs our 80M) and they're already aged 63-65 now and heading off to a well-deserved retirement.
Pensions are paltry and Japan's medical system is pretty well-regulated on the profit control side so inflation isn't going to hurt seniors.
It's either inflation or massive tax rises on everyone this decade and next.
I think Japan's problems are a lot more solvable with the yen out of the 80 area and up around 120-130. Heck, back to 220 would be a paradise for them again.
Gasoline taxes are $3/gallon so they could cut that back to soften the energy shock.
Plus I suspect they're wanting to get those nukes restarted before next year's summer demand season . . .
CB buying bonds is just swapping one government backed/issued financial asset for another and as Mosler points out is deflationary as it removes government paid interest income from the economy.
ReplyDeleteCB buying real estate and stocks could be wildly inflationary.
I wonder if the BCE could do the same and what could happen if all major economies enter competitive quantitative easing.
ReplyDeletebefore doing it the BCE should have the Eurobonds at its disposal...
http://mgiannini.blogspot.be/2013/04/launch-euro-bonds-and-then-go-bit-japan.html
I believe this type of policy will not work. Central banks cannot directly control demand and interest rate changes are blunt-force tools at best. While a policy like this could inflate asset prices alot in a boom, i believe it will not coax the private sector into actually consuming. No consumption means no reason to invest in additional capacity, which means no additional demand is created.
ReplyDeleteNow i am not sure about how this will affect the prices of financial products, but i believe that whatever happens in that sector, it will not alter the direction of other sectors.
Let's see what happens. Best case, we have a solution that fits both sides politically. Worst case, we don't have a solution at all, but rather an unnecessary market disturbance.
//OWH
You need to first think about what exchange rate Japan wants, and work back from there to figure out what policy it needs to get there.
Deletethe ¥80 regime was killing Japan -- Japan's hourly wage was Shenzhen's daily wage.
People say Japan needs to open up their service sector to foreign 'efficiency'.
Foo on that. Efficiency is just a way to pull wealth out of the Japanese economy.
When I arrived in Japan in 1992 the yen was at 125, a 50% strengthening from the pre-Plaza days.
Prices, though, were still largely unmodified from the previous regime, so everything looked expensive in dollar terms.
>i believe it will not coax the private sector into actually consuming
Prices WILL go up as the yen goes down. The government can soften the shock by lowering the gas tax etc, but that is not in the plans AFAIK.
The question is what's going to happen to wages. Just making the cost of living go up isn't going to help anyone, sigh.
For wages to go up, industry is going to need to demand more domestic labor. For that to happen, they need a more favorable yen regime vis-a-vis China.
I am guardedly optimistic about the Abe plan, for these currency reasons. The scandinavian export economies also run weak currencies to give them an advantage.
Hey there!
DeleteMy interpretation of macro factors is a bit different. I do not believe this QE will have more than marginal effects on the exchange rate. I also don't believe the exchange rate is all that central, even if it's part of the solution.
The demand for labour is related to aggregate demand, not only external demand, so it can be arranged in other ways too.
Being a scandinavian myself, i know about our currencies, and i can tell you they're not weak per se. They all float, except in Finland (Euro). The Swedish Krona is strong at the moment. Wages in Denmark are as high as ever (~18USD/hour market minimum wage). Norway is the richest of our countries with incredibly cheap imports. These are not currency regimes intended to be weak, but rather market-oriented and floating.
The only advantage Scandinavia has is the policy-mixes, except for Norway. Norway has oil. The other Scandinavian coutries have competent labour and high productivity, low corruption etc. Also - While Scandinavia isn't a weak exporter, it is primarily a region of strong policies for mass-consumption, which helps drive domestic demand.
Troy,
DeleteI like your comments.
I can see how the fear of inflation is overblown.
First it seems to me the BOJ is mainly increasing the monetary base.This does not mean that velocity will spike up.
Just look at what happened in the US where velocity has been plunging non-stop for the last 7 years (with or without QE).
Then under-employment is now structural in Japan and with capacity utilization being so low, it looks like there is a huge margin before anything wild happens.
So yes the key is probably the currency "war" Japan is finally starting. With only 17% of its economy now geared towards exports as the country has learned how to adapt to decades of deflation, there is so much room to grow here.
Japan might finally regain lost market shares to often inferior products from China...and of course Korea, which Galaxy phone might have never existed had the won not depreciated so much vs the Yen in the last 10 years !
With a weaker Yen, the fundamentals of the growth model so many countries have enjoyed since the mid-90's would start being threatened here...no wonder China started "voicing its concerns" about Japan's new policy.
I'd love to hear Noah's feedback here...if I might ask.
Cheers.
Yes, Mr. Abe. Excellent job! You have demonstrated your utter cluelessness with respect to macroeconomic fundamentals and will now go down in history as the man who drove the Japanese economy off a cliff and destroyed the yen along with your yes-man Kuroda.
ReplyDeleteListen to hedge fund manager Kyle Bass, who accurately shorted subprimes to the tune of a half bil, shock the Keynesian establishment by calling the JPY short as his next big bet.
http://www.bloomberg.com/news/2013-04-09/bass-says-japan-bondholders-reaction-to-stimulus-telling.html