After a couple decades of near-zero growth, Japan finally elected a government that promised to get the hell out of the so-called “liquidity trap” (low growth coupled with low interest rates) by raising the inflation target from 1% to 2%. Did it work? Well…
Lars Christensen:
This is yet another very strong prove that monetary policy can be extremely powerful. The graph also shows the importance of the Chuck Norris effect – monetary policy is to a large extent about expectations or as Scott Sumner would say: Monetary Policy works with long and variable leads – or rather I believe that the leads are not very long and not very variable if the central bank gets the communication right and I believe that the BoJ is getting the communication just right so you are seeing a fairly strong and nearly imitate impact of the announced monetary easing.
PS As there tend to be a quite strong positive correlation between earning growth and nominal GDP growth I think we can safely say that the sharp increase in earnings expectations in Japan to a large extent reflects a marked upward shift in NGDP growth expectations.
Pretty clearly we don’t need the fiscal stimulus that Krugman, DeLong, and others have been agitating for. There is no such thing as a liquidity trap, only ineffective central banking policies.
The “Chuck Norris effect” is a great way to understand why “expectations uber alles” in monetary policy. If Chuck Norris says “I am going to beat up everyone in Room A who doesn’t move to Room B” then he may not actually have to beat anyone up in order to move everyone to Room B. The Fed can generally move policy wherever it wants within the bounds of its credibility simply by giving guidance.
Time for the US to emulate Japanese policy? I feel like it’s the 1980s all over again.
(h/t Scott Sumner)
Comments
24 responses to “Market Monetarism Is Working In Japan”
What concerns me about current policy is that it might actually work, at least for a while. It might actually be possible for the government to create money, and spend it on the priorities of the governing class, while not immediately destroying the economy.
The great innovation of Anglo-Saxon society, at least regarding government, was to harness the King to the people’s welfare through the King’s need for tax revenue. If the King’s revenue depends on the people’s wealth, it behooves him to make sure the people are prosperous. This gave England (and its offshoots) an advantage over other societies (such as France) in which the king’s revenue was independent of the country’s wealth, at least over the short term.
Have we finally figured out how to decouple short-term government revenues from the public’s prosperity? Next stop, “le’tat, c’est moi“. Or is it “apre moi, le deluge“?
A contrarian view:
http://www.zerohedge.com/contributed/2013-05-10/it-game-over-japan
Please explain to me just how printing money creates wealth and an expanding GDP. I am really stupid when it comes to economics. I always thought production was a precursor to wealth and money creation.
I think I get it now. You make the money first, and then voila, the goods appear. To think I’ve had it backwards all these years. I shall never again use that worn out phrase about making money when I work. It’s the other way around.
Thanks for the clarification.
Frank — MM isn’t about printing money (in fact NGDPLT would have meant a tighter monetary policy during most of the 2000s), it’s about staying out of the ZLB and the associated deflationary ills, and providing a smooth NGDP path,
In fact, the Fed could stop doing all these crazy asset purchases if they just gave up their 2% inflation target.
Why does cash matter? During TGD (for example) the government instituted a drastically deflationary policy. The economy became so cash-poor hundreds of local concerns actually started issuing their own scrip. You can imagine how difficult this made life for businesses trying to stay afloat; while today’s concerns aren’t quite as dire the best balance seems to be stable NGDP growth.
Neil — it’s scary. If Krugman had his way we’d be headed off the end of the sovereign Plank curve. We might not get to 10 million percent inflation like Zimbabwe, but 30-40 percent is definitely possible (and very frightening).
Dave-
Wouldn’t market monetarism do the same thing? After all, we’ve not reached a GDP growth level that New York or Washington would accept as a target.
I suspect we’ve reached full growth and employment for our current structure, but I’m clearly in the minority on that.
Neil — it’s scary. If Krugman had his way we’d be headed off the end of the sovereign Plank curve. We might not get to 10 million percent inflation like Zimbabwe, but 30-40 percent is definitely possible (and very frightening).
Interesting, can you provide the economic analysis behind the 30-40% conclusion? Surely there’s some sort of calculation involved that allows you to conclude the range is 30-40 and not 20% or 50%.
And if not 20 and 50 could we have a more exact guess? 21.69347 say. Or maybe 46.915483.
What precision should be demanded of guesses? Should they be labeled? Precision guess. Random guess. Arbitrary guess. Informed guess. Historical guess. Some one paid me for this guess. You want a different guess? How much is it worth? Care to guess?
What precision should be demanded of guesses? Should they be labeled? Precision guess. Random guess. Arbitrary guess. Informed guess. Historical guess. Some one paid me for this guess. You want a different guess? How much is it worth? Care to guess?
I dunno, if I’m told I should be frightened by a number, I expect it to not be arbitrary. How is it possible to be frightened by a number that is made up? It was a question that should not be difficult to answer. Is asking for the logic behind a comment too much thinking for you?
How is it possible to be frightened by a number that is made up?
You want a real number, here is one: 20,000,000. That is approximately the number of homes foreclosed on since the housing crises started.
http://www.statisticbrain.com/home-foreclosure-statistics/
People left homeless, living in tents or cars, shacked up with parents or grandparents, living in overpriced rundown apartments, working for shit wages at jobs reduced to less than 30 hours a week, all so your buddy Obama and his banker supporters can enjoy the high life at the finest beaches and golf courses, dine with Hollywood and Hamptons scum, and laugh while he zaps the occasional raghead.
That is the reality AJ, the real effects of a government inflated bubble and the non-solution an incompetent asshole has provided.
The next inflation bubble is now building in the bond market. Billions created out of thin air are being pumped into it by the Fed. You think the real employment numbers are scary now, wait until that bubble blows.
Janet is buying 2 billion hollow points and urban humvees because she’s expecting an invasion my friend.
Janet isn’t buying…
The next inflation bubble is now building in the bond market. Billions created out of thin air are being pumped into it by the Fed. You think the real employment numbers are scary now, wait until that bubble blows.
Janet is buying 2 billion hollow points and urban humvees because she’s expecting an invasion my friend.
You know, to have any credibility, your doomsday predictions have to come true at some point. You can’t just keep harping on the same doomsday scenarios and saying “oh just you wait AJ, just you wait!” Lol.
Neil,
“Wouldn’t market monetarism do the same thing [lead to high inflation]?”
That’s a very common confusion. High inflation would mean high NGDP growth — remember, the idea behind NGDPLT is to avoid large nominal fluctuations. Bad fiscal policy could drive monetary policy into inflation just to keep the government afloat, NGDPLT will only allow inflation when the economy has suffered a large nominal shock.
Scott actually has a great FAQ up now that explains a lot of this, highly recommended.
http://www.themoneyillusion.com/?page_id=3447
TheAJ — Thanks for trolling! Out of food, sorry 🙁
AJ: You know, to have any credibility, your doomsday predictions have to come true…
The collapse of the housing bubble and attendant misery is not a prediction. You didn’t address that. As to Janet, can you offer another explanation, one that is more credible?
The collapse of the housing bubble and attendant misery is not a prediction. You didn’t address that.
What’s there to address? You’re attributing a housing bubble that peaked mostly from 2003-2007 and the attendant misery to a president who assumed office in 2009.
Again, how many runaway inflation predictions have there been in the last 3 years. How many “30-40% inflation is real!” predictions. At what point do you ever say “I was incorrect?”
As to Janet, can you offer another explanation, one that is more credible?
Should I address the price of tea in china too?
Ask the NRA.
http://www.nraila.org/news-issues/articles/2012/federal-law-enforcement-agencies-buy-ammunition.aspx
Again, how many runaway inflation predictions have there been in the last 3 years. How many “30-40% inflation is real!” predictions. At what point do you ever say “I was incorrect?”
http://www.shadowstats.com/article/no-414-hyperinflation-special-report-2012
http://www.shadowstats.com/article/no-414-hyperinflation-special-report-2012
http://www.shadowstats.com/article/no-500-special-commentary-us-government-gaap-based-2012-financial-data
Read those and get back to me end of next year.
You must be a complete dumbfuck if you think we have been experiencing 10% YoY inflation and that the economy has basically been in recession this entire decade.
If inflation is as bad as you think it is, you should be taking out as many loans as you can get your hands on.
I had to take a break from laughing. Anyways, please tell me what your prediction for year end 2013 is? I hope you don’t plan on referencing a janky website whos statistics cannot be recreated on December 31st to prove you win. At that point we may as well start pointing to Glenn Beck facebook statuses as proof.
You’re not one of those guys who’s buying gold coins after watching Fox news are you? Lol.
No AJ, I haven’t been buying gold coins. I much prefer a 6 month supply of nonperishable food, bottled water, plenty of long life batteries, a medicine cabinet fully stocked, and certain items like liquor that can be bartered. I’m a real nut case just like the millions of Mormons who have been doing the same thing forever. Should runaway inflation predictions not come true I will nevertheless be fully prepared for the next San Andreas catastrophe or Mount St. Helens eruption. And no matter what doesn’t happen I can get good and drunk.
And by the way, the proof of a lost argument is the resort to ad hominem attacks. And ridicule only works if your opponent lacks self esteem.
Let’s try to keep it civil, folks.
I’m sorry Frank 🙁
Now please, tell me more about 10% inflation!
Have you read this, Dave?
http://www.zerohedge.com/news/2013-05-18/boldly-they-rode-and-well-or-why-japan-not-america
Frank — it’s an interesting theory.
Scott would doubtless have a more elegant answer than I, but here’s what I’d say: by the end of the year, Japan wiull either have runaway devaluation or not. If they don’t, and are growing, then I think market monetarists win a major victory.
All of these arguments are predicated on the notion Japan has easy money. But they’ve been at near-zero rates for 16 years now. Now suddenly the stock markets soar 70% on easier money? Either the markets are wrong or ZH is, we’ll see.
I should add, it’s possible Japan is at a point of no return because of the size of its debt. They may be balancing a knife’s edge — if growth causes real interest rates to rise, interest expense can suddenly get much larger depending on the allocation between short-term and long-term.
Dire warning:
http://www.zerohedge.com/news/2013-05-21/math-stacked-against-japan-its-not-if-its-when
And then this:
http://www.zerohedge.com/news/2013-05-23/japanese-stocks-plunge-over-800-points-biggest-drop-22-months
Uh oh.