Abenomics

"Asked about potentially more aggressive approaches to monetary easing, such as targeting a price level or a rate of growth for nominal gross domestic product, Mr. Kuroda said he thought they were reasonable steps to consider but that the Bank of Japan would stick to its current policy for now. "

Japan Escaping Deflation Trap, Central Bank Chief Says

JACKSON HOLE, Wyo.–Japan is gradually escaping a prolonged period of deflation that has impeded economic growth, stifled investment and put downward pressure on wages, Bank of Japan Gov. Haruhiko Kuroda said Saturday. 

Speaking at the Kansas City Federal Reserve’s Jackson Hole, Wyo., conference, Mr. Kuroda said that, unlike the U.S. and Europe, Japan isn’t struggling with unemployment, which currently stands at 3.7%. 

However, he said deflation had led to other forms of economic malaise that continue to plague the Japanese economy, but which Mr. Kuroda said is gradually healing as aggressive economic policies take hold. 

“Wage-setting practices have changed during the prolonged period of deflation. Wages of regular employees tend to reflect labor market conditions only quite slowly,” he said. “Some kind of mechanism, a ‘visible’ hand, is necessary for wages to rise.” 

Part of such a mechanism is the central bank’s aggressive monetary easing, which includes an indication that it will take all steps necessary to return Japan’s inflation rate back up to 2% after two decades of falling prices and wages. 

“The Bank of Japan’s price stability target can serve as a benchmark for firms’ wage setting,” Mr. Kuroda said. 

He added the policies were having a tangible impact on economic conditions, with labor market conditions improving and firms showing a greater propensity to invest. 

Still, Mr. Kuroda acknowledged that it could change some time to push up Japanese consumers’ inflation expectations after so many years of deflation. 

Asked about potentially more aggressive approaches to monetary easing, such as targeting a price level or a rate of growth for nominal gross domestic product, Mr. Kuroda said he thought they were reasonable steps to consider but that the Bank of Japan would stick to its current policy for now. 

“Maybe in the future. But at this stage I don’t think we should change our plan,” Mr. Kuroda said. 

Under price-level targeting, a central bank would promise to overshoot its inflation target to make up for any period of undershooting. Under nominal GDP targeting, the central bank would target a constant growth rate in noninflation adjusted GDP. 

Mr. Kuroda vowed to maintain Japan’s aggressive monetary-policy easing until the country reaches its 2% inflation target, which he said could happen as early as this fiscal year. 

Mr. Kuroda said that once inflation starts moving higher, 10-year government bond rates around 0.5% will not be sustainable.

Abenomics

Stocks, Flows, and Abenomics by Dean Baker

Abenomics has only worked because foreigners think it will by Matt O'Brien

Sumner on Abenomics

What markets are telling us about Japan by Scott Sumner

Japan is a perfect case study. Asset markets took off after mid-November 2012, when then candidate Abe first indicated he was going to push for a 2% inflation target. The yen fell from about 80 to the dollar to 103 today, while the Nikkei rose from under 8700 to over 15,300 today. So the asset price gains have been sustained. And we did see a rise in the Japanese price level, RGDP and NGDP. So in one sense Abenomics “worked.” 

On the other hand the Japanese 10 year bond yield is 0.51%, vs. 2.50% in the US, and the 30 year bond yield is 1.67%, vs. 3.30% in the US. That tells me that the bond market probably expects Japanese inflation to remain well below US levels in the long run, perhaps close to zero. And that suggests that Japanese asset markets believe that the political obstacles remain formidable. After all, Abe won’t be the prime minister forever. 

So my overall views on Japan are mixed. I view the depreciation of the yen and the huge stock market rally as signals that the Abe government overcame formidable political odds. Good for them. I view the low bond yields as a sign that the markets now expect the BOJ to rest on its laurels, and not try to push the price level even higher. That’s not so good. The labor market is no longer the biggest problem in Japan; it’s the debt situation. As long as nominal interest rates are near-zero the BOJ is needlessly worsening Japan’s long term fiscal situation. 

Don’t pay any attention to GDP, which soared in Q1 and will plunge in Q2. The forex rate and stock prices are the best short term indicator of how the BOJ is doing. If the yen moves into the 110 to 120 range, that would suggest my political forecast was too pessimistic. If it moves below 95, I was too optimistic. 

PS. Matt Yglesias points out the absurdity of Obama touting the strong jobs market. But Yglesias’s post is marred by an unwillingness to mock Obama for saying this while also arguing for bringing back the emergency unemployment insurance program–intended for lousy job markets.

Andolfatto interviews Woodford

Then Woodford suggests that the relationship between long-term rates and the economy is not as clear as with traditional tools. We agree that it’s not at all clear (never reason from a price change), but we think that’s also true of traditional tools. One cannot assume that lower interest rates produced by the Fed will lead to strong growth in AD. It depends on the relative strength of the liquidity, income and Fisher effects. 

In the final paragraph I quote, Woodford points out that most people think that Fed purchases “obviously” boost the price of the asset being purchased. They misuse the S&D model. Some commenters are outraged that the Fed is helping group X, because group X owns lots of the assets that the Fed is buying. They see dark conspiracies. But the purchase of bonds is also the sale of cash. And more cash boosts inflation, which reduces bond prices. During the 1964-81 period the Fed radically increased the amount of bonds it was buying, this led to rapid growth in the monetary base, higher inflation, and much lower bond prices. So much for Cantillon effects.

Yes, there are cases where large asset purchases are associated with low inflation (such as recently); my point is that there is no consistent relationship between Fed asset purchases and the price of that asset.

Abenomics

Shinzo Abe is actually pretty awesome by Noah Smith

Abenomics

Japan growth up

Abenomics

Abenomics a Short-Run Success: Reading Hausman and Wieland: Friday Focus: March 21, 2014 by DeLong

Abenomics

Japan’s Wages Mask Rise of Hottest Job Market Since 70s: Economy by Masaaki Iwamoto

Abenomics works

Government Stimulus Lifts Japan by Floyd Norris

Abenomics

Monetary Policy in Japan: Finally on Track by Phillip Swagel

What about Sadowski's point that imports increase more than exports?

Abenomics

Michael Darda: How is Abenomics Doing?: “Leading indicators in Japan have been on the upswing…. Abeonomics is working. One reason that the previous round of QE in Japan didn’t lift growth much is that it was expected to be temporary and proved to be temporary as occasioned by a 20% collapse in the monetary base in 2006. This time, however, at least part of the increase in the base is expected to be permanent, hence the new 2% inflation target. In short, the BoJ has to do enough to satiate a broad money demand function that has been growing 2-3% per annum…. Reflation should help to ease Japan’s debt and fiscal burden… restoring at least moderate NGDP growth should help Japan’s budgetary fortunes. This is one reason that the rise in Japan’s inflation breakeven spreads has been inversely related to credit default swap spreads on Japan’s debt. Broad money growth in Japan has begun to recover convincingly, which should also be bullish for the equity market…. We believe Japan equities have 20-40% upside…”

(via DeLong)

positive outlook

Q3 GDP revised up to 4.1% . PCE revised up to 2.0% annualized increase.

Joe Gagnon Responds to Michael Woodford, Ben Bernanke, and Others on the Risks and Power of Quantitative Easing by DeLong

Enlightened was the best TV show of 2013

How is Abenomics Doing? by David Beckworth
It's working.

He links to Ambrose Evans-Pritchard who writes:

Japan, too, has grasped the nettle, breaking free of its deflation trap with the most radical policy experiment of modern era...After two decades of monetary tinkering the Bank of Japan is mopping up 7.5 trillion yen worth of bonds each month, almost as much as the Fed in an economy barely more than a third the size. It is buying long-term debt for the first time...

Japan was the fastest growing economy in the OECD bloc in the first half of this year. There was a hiccup in the third quarter, causing the faint-of-heart to write off Abenomics. Yet Nomura's Shuichi Obata says the December Tankan survey of business shows that confidence is at last spreading from big companies to small firms, with the services index rising above zero for the first time since 1991. 

Japan

NYT Isn't Sure Whether Abenomics Has Led to a Shortage of Workers or a Shortage of Jobs, but It Wants Readers to Think It's Bad  by Dean Baker

It is likely that many readers thought these numbers are annual growth rates. As such, these would be indeed be low. However, they are in fact quarterly growth rates. Even after the downward revision Japan's economy would still have been growing at a 1.2 percent annual rate in the third quarter. Since Japan's population is shrinking at a 0.1 percent annual rate, while the U.S. population is growing at a 0.7 percent rate, this means that even in this relatively weak quarter (which followed two quarters of strong growth), Japan's per capita growth rate exceeded the U.S. growth rate over the last three years. Readers who thought these numbers referred to annual growth rates would not be aware of that fact.

Abenomics

Yes more exports, but even more imports than exports as domestic demand increases.

Mark A. Sadowski on Abenomics

Observations on the Efficacy of Monetary and Fiscal Policy - Econbrowser

"Real net exports have increased since the last quarter of 2012. While the increase is modest, it is an increase; in contrast, in nominal terms, net exports continue to decline in both absolute terms, and as a share of nominal GDP."

Although Japanese nominal exports have surged by 15.2% between 2012Q4 and 2013Q3, nominal imports are up by even more, or by 16.5%:

http://research.stlouisfed.org/fred2/graph/?graph_id=149566&category_id=0

Devaluation improves a country’s trade balance only if the Marshall-Lerner condition on trade elasticities holds, and research shows that they’re not met in the majority of cases, either past or present:

http://www.emeraldinsight.com/journals.htm?articleid=17056473

That's not to say that currency devaluation isn't beneficial, of course it is, but the benefit flows primarily from increased domestic demand. Here is a study of the competitive devaluations of the Great Depression by Barry Eichengreen and Douglas Irwin:

http://www.dartmouth.edu/~dirwin/w15142.pdf

The Great Depression is a particularly important historical example because then, as now, most of the advanced world was up against the zero lower bound in policy interest rates.

An examination of Figure 4 on page 48 reveals that the only countries that experienced import growth from 1928 to 1935 (the UK, Japan, Sweden and Norway) were members of the sterling block that devalued early (1931). In most of these countries net exports actually declined over the period because imports rose more than exports.

The order of recovery from the Great Depression follows the order in which they abandoned the gold standard perfectly:

http://fabiusmaximus.files.wordpress.com/2009/03/gold.png

But this wasn't because of increased net exports.

The US devalued in 1933 which immediately led to a swift recovery from the Great Depression. Nominal exports doubled from 1933 to 1937. But nominal imports increased by 110.5%:

https://research.stlouisfed.org/fred2/graph/?graph_id=120991&category_id=0

As a result net exports went from a small surplus (about 0.2% of nominal GDP) to being roughly in balance.

France was part of the Gold bloc of countries that devalued late (1936). From 1936 to 1938 nominal exports increased by 95.4% and nominal imports increased by 80.9%:

https://research.stlouisfed.org/fred2/graph/?graph_id=120992&category_id=0

However, since imports were already substantially greater than exports, the nominal deficit actually increased by 55.4%.

Japan’s original ryōteki kin’yū kanwa (QE) was officially announced in March 2001 and concluded in March 2006. The following is a graph of the BOJ’s estimate of Japan’s real effective exchange rate which is trade weighted with respect to 16 different currencies and takes into account their relative inflation rates:

http://thefaintofheart.files.wordpress.com/2013/06/sadowski2b_1.png

The real effective exchange rate fell from 116.25 in February 2001 to 91.09 by March 2006, when the BOJ announced the completion of QE, a decline of 21.6%.

Exports rose from 10.2% of nominal GDP in 2001Q4 to 19.3% of GDP in 2008Q3. Imports rose from 9.4% of GDP in 2001Q4 to 19.5% of GDP in 2008Q3. From 2002Q1 to 2008Q1 real (adjusted by the GDP implicit price deflator) grew at an average annual rate of 11.0%. Real imports grew at an average annual rate of 12.1%.

So there was boom in both exports and imports. But imports grew faster than exports, and net exports actually moved from surplus (0.8% of GDP) to deficit
(-0.2% of GDP) between 2001Q4 and 2008Q3:

http://research.stlouisfed.org/fred2/graph/?graph_id=120989&category_id=0

It's very telling that today the only major currency area up against the zero lower bound in interest rates that hasn't done QE (the Euro Area) is also the only major currency zone where the trade balance has improved substantially since 2009, going from 0.6% of GDP in 2009Q1 to 3.5% of GDP in 2013Q2:

https://research.stlouisfed.org/fred2/graph/?graph_id=149559&category_id=0

But this has occurred in large part because nominal imports have been falling since 2012Q3 due to falling domestic demand. Nominal exports have barely changed since 2012Q3.

Abenomics

Forget the PS4. Here’s what’s really saving the Japanese economy by Neil Irwin

...Even using the inflation measure favored by the Bank of Japan, which includes energy but excludes fresh foods, Japanese prices rose 0.9 percent over the last year, which is still far below the 2 percent that the bank is aiming for.

Just as currency markets priced in higher inflation last winter and spring, inflation that is just now starting to materialize, if markets perceive that the government is taking the uptick in prices as victory, things could swing the other way just as quickly.

In other words, the record on Abenomics is so-far, so-good. There is a lot more reason for optimism that the world's third-largest economy has a true recovery underway than there was a year ago, and the most recent inflation data is an important part of that story. But nobody in Japan should be partying like it's 1989.

via DeLong:

Jennifer Thompson and Ben McLannahan: Japan inflation data offer fillip to Shinzo Abe: "Japan is on track to win its war on deflation with the latest consumer price inflation figures showing the highest reading since the country slipped into deflation 15 years ago. Core consumer price index inflation, which excludes fresh food but includes energy, hit 0.9 per cent in October, up from 0.7 per cent the previous month and in line with economists’ expectations. Excluding both fresh food and energy, it reached 0.3 per cent, the highest reading since 1998, indicating that rising energy costs alone were not the sole factor in inflationary pressure..."

Japan's current account balance

Japan's Missing Wall of Money by  Thomas Klitgaard

Market commentary at that time suggested that flooding the economy with liquidity would lead to a “wall of money” flowing out of Japan in search of higher yields, affecting asset prices worldwide. So far, however, Japan’s wall of money remains missing in action, with no pickup in Japanese foreign investment since the April policy shift....

...The Bank’s asset purchase program set off no wall-of-money outflow from Japan. Instead, funds were brought back into the country.

Cross-border inflows and outflows typically move in tandem because net financial flows are tied to the current account balance. There could be a surge in outflows if the current account surplus were also to surge, but current account balances tend to be sticky. The weakening in the yen since the April meeting will boost exports, but it will also boost import prices in yen terms, leaving Japan’s current account balance largely unaffected. Given the stickiness of the current account, there can be no wall of money flowing out of Japan without a wall of money flowing into Japan.

(via Thoma)

sterilization

Mark A. Sadowski comments:

"The U.S. could weaken the currency and help exports however. That's what Japan is doing as Krugman has said."

It's important to distinguish between currency manipulation and expansionary monetary policy.

China engaged in currency manipulation and I suppose an argument could be made that the German/eurozone situation is effectively currency manipulation in Germany's favor. But Japan has simply conducted expansionary monetary policy.

You can see this in terms of the differing impacts on their respective trade balances.

Both China and Germany have had large trade surpluses. But Japan has a trade deficit, and since the latest QE was initiated, both imports and exports have grown quickly with imports growing even faster than exports.

So Japan's trade balance has actually grown worse. The benefit of expansionary monetary policy comes from increased aggregate demand, not from higher net exports. China (and perhaps Germany) has held the value of its currency low while sterilizing the effect of this policy on domestic demand.

Both policies result in lower exchange rates, but one allows domestic to demand to rise and one does not. That's why currency manipulation is "beggaring thy neighbor", and expansionary monetary policy is not.

Japan allowed inflation to rise, while China and Germany did not.

positive outlook

Abenomics and Japanese Inflation Expectations by Carola Binder

But there is a glimmer of hope. Consumers' perceptions of current economic conditions and of the economy's growth potential are both looking-- well, not bright, but brighter than before.

inflation and expectations; Shiller

PPP and Japanese Inflation Expectations (Extremely Wonkish) by Krugman

I have my doubts about the apparent decline in recent months. It’s being driven not by events in Japan but by the taper scare, which drove up US rates. There is a question about why that rise in US rates didn’t produce a lot more yen depreciation, but something seems off here.

The main point, however, is that this measure does suggest a substantial rise in expected inflation since Abenomics began, which is good news.

Sharing Nobel Honors, and Agreeing to Disagree by Robert J. Shiller

In Fed and Out, Many Now Think Inflation Helps by Binyamin Appelbaum

Faster Inflation Would Help…Really! by Jared Bernstein

Bill de Blasio for Mayor by the NYTimes Editorial Board

Election is in 10 days?

Positive Outlook: Abenomics is succeeding. Obamacare will succeed. Republicans will lose House next year. Yellen. Economy should pick up even if inflation is below target.

Update:
The Economics of Rip Van Winkle by Krugman 

Binyamin Applebaum’s piece on the growing acknowledgment that moderate inflation can help, especially under current circumstances. But I can’t help thinking, only now they notice? I mean, this was all worked out and carefully explained fifteen years ago.

Oh, and the hard thing now is how you get inflation when we’re already at the zero lower bound. You really want this tied to expansionary fiscal policy, not austerity.

Still, any intellectual forward motion is welcome.

Abenomics and sales tax

Japan Sales Tax to Increase Next Year, Abe Says

Japan’s consumption tax: a test of modern macro? by Simon Wren-Lewis

The common theme here is the importance that modern macro places on expectations of a fairly rational kind. Yet even if you are happy to go along with this, there is an important proviso that does not get emphasised enough. How did consumers know that the budget deficit would be reduced by raising taxes rather than cutting spending? If they had expected the deficit to be reduced by lower government spending, they will not have expected a fall in their post-tax real income. For these consumers the Prime Minister’s announcement will come as a surprise, and they will reduce their consumption as a result.

This argument is completely consistent with consumers being rational and forward looking, as I emphasise here. All the behavioural assumptions required for Ricardian Equivalence can still be there. What Ricardian Equivalence implicitly does is hold the path of future government spending fixed, but that is an artificial assumption which cannot be true in practice, if only because of political uncertainty. (The argument applies more generally to the small amount of modelling that has attempted to demonstrate ‘expansionary austerity’.)

So we can summarise as follows. If consumption remains on average unperturbed by the sales tax increase (perhaps showing a positive spike before April 2014 which is only partially offset by falls thereafter), then modern macro can pat itself on the back. On the other hand if consumption does take a significant hit, modern macro has an escape clause. Let us hope it does not need it.

Edit: Abe Increases Both Stimulus Spending and Taxes!? What’s Up with That? by Jared Bernstein

Abenomics

The line from 9/11 to Lehman to Syria by Greg Ip 

How long will the divisive effects of the financial crisis last? No country is the same, and in America, polarisation has many causes that predate the crisis: rising income inequality, gerrymandering and the continued post-civil rights migration of southern voters from the Democratic to the Republican Party. But I see two plausible answers to that question when it comes to economic matters.

One, a fully recovering economy will restore private and public balance sheets, erasing the divide between creditors and debtors and obviating the need for zero-sum austerity. Or two, the economy will stagnate for years until the country coalesces behind a single, bolder vision for economic reform. I used to think Japanese voters would never vote for higher inflation because as its population ages, the proportion of voters who favour falling prices expands. Happily, I may soon be proven wrong. Shinzo Abe seems to have united the country behind a call for fiscal, monetary and structural stimulus. Japan, which showed the way in to post-crisis politics, may yet show the way out.