Smith continues to hammer on this idea that as a career politician, Abe is really just interested in political issues:
By making lots of noise about revoking the BOJ's independence, Abe is trying to convince foreigners that inflation is on the way, thus sending the yen south. Basically, he is taking a page out of the LDP's old playbook - weaken the currency, pump up exports. Sure, it's not a sustainable strategy, but Abe doesn't need it to be sustainable; he just needs it to give the economy a fillip for long enough to let him complete his precious revision of the Japanese constitution. After that, he couldn't care less about what happens to the economy. It's a cursory, stopgap measure. To Abe, Japan's pride as a nation is infinitely more important than the fatness of its people's wallets.
This perspective leads Smith to hypothesize that those hoping for Japan to take center stage as ground zero of the world's next big monetary policy experiment in 2013 will likely be disappointed in a big way.
So what does this mean for monetary policy? It means that Abe is targeting exchange rates, not inflation (or NGDP). He'll do what he has to do to tweak foreign expectations enough to keep the yen weak, but he won't actually follow through and revoke BOJ independence. And even if by some miracle he does revoke BOJ independence, he won't insist on a hard inflation target. A non-independent BOJ wouldn't be controlled by Shinzo Abe, it would be controlled by the Ministry of Finance, and those people are just as likely to fear the peril of hyperinflation.
Expect Abe to continue making noise at the BOJ, and expect to see some token BOJ response, i.e. a bit more quantitative easing. If the yen starts rising again, expect Abe to switch gears and start talking about (or actually carrying out) currency market intervention of the type carried out in 2004. Essentially, he will continue the current talk of radical monetary policy experimentation precisely as long as he thinks it's holding down the yen, and then abandon it for a different mercantilist stopgap. Do not expect any real action against the BOJ.
Yglesias versus Smith and Kelton verus Woodford.
Floyd Norris at the Times seemed to agree with Yglesias.
Wow, Smith is getting all sarcastic. See the update:
Update: And now today, via the WSJ, I see that I'm completely right about the LDP's economic philosophy. Observe:Yglesias writes "But if he does manage to stick to his guns, the odds are good that it will work. Monetary expansion should reduce the price of the yen and goose exports." So they're in agreement.
Japan's new finance minister upped the ante in the country's war of words against the strong yen, lashing out at the U.S. and Europe for letting their currencies weaken dramatically and calling on the U.S. to strengthen the dollar.The tirade from Taro Aso, Prime Minister Shinzo Abe's point person on currency strategy, underscores the increasingly pugnacious stance of the fledgling Abe government..."The U.S. ought to do its job and make the dollar strong. And what about the euro?" Mr. Aso said Friday...A procession of Japanese executives and politicians have bemoaned the yen's strength, blaming it for a loss of competitiveness, dwindling earnings, bankruptcies and the relocation of operations abroad...The dollar has recently staged a sharp recovery, as Mr. Abe's pledge to strong-arm the Bank of Japan into easing monetary policy to weaken the yen has driven investors to sell off the yen. (emphasis mine)Oh yeah, they're really thinking a lot about inflation rates and money demand and the Zero Lower Bound. Sure.
Just as with the Evans rule, we'll see how this plays out.
Scott Sumner via Thoma commenter Sadowski:
It would be interesting to know which monetarists Noah is talking about. (The only “innocent” monetarist Noah links to is Matt Yglesias, who is neither innocent nor a monetarist.) Like Noah, I’ve been skeptical of the intentions of the Abe government, noting that bond yields don’t show much sign of inflation expectations. On the other hand the yen has weakened, so there’s likely to be at least a modest change in policy. But I put faith in markets, not politicians.As Sumner writes, the thing to keep an eye on are inflation expectations.
Smith writes: "Finally, we get to see the ultimate two-men-enter, one-man-leaves doomsday showdown between the immovable object of Japan's implacable deflation and the irresistible force of Print Money And Buy Stuff!"
I don't know the exact story with Japan, but with the U.S. since 2008, low inflation wasn't an "immovable object." I suspect Japan's deflation isn't either. Low inflation was the target for the Fed. When inflation expectation began dipping, the Fed did a QE and they went back up.