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.

secstags or policy-induced paralysis

When It Comes to Generating Jobs It Pays Not to Listen to the Experts by Dean Baker

It is remarkable that no country has outlawed economics as a dangerous occupation on a par with drug dealing or murder for hire. The damage done to the world over the last seven years based on policies designed by economists has been incredible. 

Floyd Norris documents this fact in a nice piece comparing the change in employment rates (the percentage of the population employed) in rich countries since 2007. The only two countries with higher employment to population ratios today than at the start of the downturn are Germany and Japan. Both countries have broken with the economic orthodoxy in important ways. 

In Germany, the government has adopted policies that encourage employers to keep workers on the payroll by cutting back hours rather than laying them off. As a result, their unemployment rate is almost three percentage points below its pre-recession level even though its growth has actually been somewhat slower than in the United States. 

Japan has adopted a policy of aggressive deficit spending even though its debt to GDP ratio is already more than twice that of the United States. It also has deliberately targeted a higher rate of inflation as a way of lowering real interest rates and reducing debt burden. As a result, it has created a number of jobs that would be the equivalent of more than 4 million in the United States. 

In short, ignoring the economic orthodoxy works. Listening to orthodox economists brings destruction to the economy and devastates peoples' lives.

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)

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

Japan and the consumption tax by Simon Wren-Lewis

...A key issue is the proposal to raise the national consumption/sales tax from 5% to 10% in two stages beginning in April next year. Japanese Prime Minister Shinzo Abe says he will wait until probably the autumn to make a final decision, and the macroeconomic outlook will be a key factor. The proposal has the support of Bank of Japan governor Haruhiko Kuroda. However the more interesting question for Kuroda is how the Bank will react to the sales tax increase.

Much of the reporting on this issue is along the familiar lines of whether it is better to focus on reducing the government’s very high level of debt (raise sales taxes) or ending deflation in Japan (don’t raise sales taxes). While this debate is a familiar one, there is an additional twist with a sales tax. An anticipated increase in sales taxes, by raising expected inflation, will - other things being equal - provide an incentive for consumers to bring forward their spending. Macroeconomists would describe this as a real interest rate effect, but in simpler terms it makes sense to buy before prices go up.

How does an anticipated increase in sales tax raise expected inflation? It brings spending forward in anticipation of higher prices?

This incentive effect has been observed in Japan in the past, and in other countries. (See page 12 of this IMF report on the issue.) The UK cut VAT for just one year in response to the recession in 2009, a measure I have described as New Keynesian countercyclical fiscal policy, and this may have raised consumption by over 1%, in part because consumers anticipated that prices would rise again in 2010. (The over 1% figure comes from here, although this analysis is more conservative.)

Didn't the UK "cut" VAT not raise taxes?

More on tax increases versus spending cuts in an austerity programme by Simon Wren-Lewis

Jaegers versus Kaiju

The Pacific Rim economies of California and Japan point the way forward. Progressive demand management versus austerity, rent-seeking and the redistribution of wealth upwards. 

via commenter "paine"

We're Taxing the Rich... and So Can You

“There is no alternative to austerity,” insist the rich, along with their politicians, foundations, think tanks, and media. 

They’ve been saying it for decades. “Taxes are bad,” they also claim. “Government doesn’t work. And public employees are greedy.” 

Consequently, common wisdom had it that “you can’t raise taxes.” Even people who should have known better believed this—while the public sector slid down the tubes. 

So how did Proposition 30 succeed? This measure, passed by voters last November, raises $6 billion a year for schools and services—in California, a supposedly “anti-tax” state. The money comes mostly through an income tax hike on rich people, along with a tiny sales tax increase of ¼ percent. 

The story should be better known, because with the right preparation, you could make it happen in your state, too.

Election Win by Ruling Party Signals Change in Japan

TOKYO — Japanese voters handed a landslide victory to the governing Liberal Democrats in parliamentary elections on Sunday, strengthening the grip of a party that promises accelerated changes to Japan’s economy and a shift away from its postwar pacifism. 

By securing control of both houses of Parliament for up to three years, the win offers Prime Minister Shinzo Abe — an outspoken nationalist who promises to revitalize Japan’s deflationary economy and strengthen its military — the chance to be the most transformative leader in a decade. Although a lackluster turnout indicated that Mr. Abe might not have as much of a mandate as his supporters hoped, the margin of victory was large enough to suggest he has an opportunity to also bring stability to the country’s leadership after years of short-lived and ineffective prime ministers.

2008-2013 and beyond

Andy Harless comments on Japan and the liquidity trap:

These fancy-schmancy DSGE models just lead to confusion. I have a pretty good intuitive idea of what's happening in Japan. There is a hypothetical bad equilibrium -- essentially a speculative bubble with money as the bubble asset, although, since money is the unit of account, most people think of the bubble as a "loss of confidence" in everything except money -- but you never really get to the bad equilibrium (we kind of did in 1929-1933, until devaluation popped the bubble), because central banks (which either won't or can't do what's needed to pop the bubble) stir up the water as much as possible to avoid moving toward equilibrium, and also because nominal wages are sticky downward, which slows down the progress of the bubble, and also probably because, if the bubble were allowed to progress, people would eventually realize that it's silly to hoard an asset without intrinsic value. (The 1929-1933 contraction was essentially a bubble in monetary gold. I imagine that bubble would eventually have ended on its own, as people realized how ridiculous the value of gold was getting relative to everything else, but it might have taken a whole lot of deflation to get to that point.) The ability to capture my intuition in an DSGE model is limited, because we're always far away from the actual bad equilibrium. Maybe a DSGD model, but that's even more confusing.

Krugman vs. Noah Smith: the first rule of macro is that it's folly to disagree with Krugthulhu

Japan and the liquidity trap by Noah Smith (July 16, 2013)

Wage-Price Flexibility in a Liquidity Trap, Again Again Again by Krugman

Japan's stagnation: demand-side or supply-side? by Noah Smith (July 15, 2013)

Tipping point and equilibrium

What Gives? Has the Market Stopped Loving Inflation? by David Glasner

Low Inflation Is the Same Sort of Problem as Deflation by Dean Baker

Crisis Withdrawal Syndrome by Krugman

Oh, since I’m praising Dean, let me say that while it’s true that he has for a long time been making the case that low inflation is a problem even if it’s not actual deflation, his implication that I’m saying this for the first time is a bit unfair. In the European context, in particular, I’ve been beating this drum for a while.

 Krugman has emphasized deflation and the liquidity trap and the press have echoed what the Fed and Bernanke say about deflation being a bad thing. Baker has made the fair point that sup-par inflation is just as bad as deflation.

We'll see if Japan can get out of deflation and if the U.S. or Europe can get out of low inflation.

More Thoughts on Job Creation in the Recovery by Dean Baker

That being said, as the NYT points out, other countries have done better. Germany stands out in this respect, having seen a sharp rise in its employment to population ratio since the beginning of the downturn, and a decline in its unemployment rate of 5.4 percent, in spite of a recovery that has been no stronger than in the United States. 

Part of Germany's story is a slower rate of growth of its labor force, but the main part of the story is work sharing and other policies that encourage employers to keep workers on the payroll, even if they work fewer hours. These policies have been remarkably successful in shielding German workers from the worst effects of the downturn. 

So to sum up, the main reason that so many people are unemployed four years into the recovery is weak GDP growth. This was predictable given the nature of the downturn. Given the weakness of this growth, the U.S. has done a pretty good job creating jobs. However other countries, most notably Germany, have done much better in translating weak GDP growth into jobs and they provide important lessons to the United States.

Is Japan a Currency Manipulator? by David Glasner

What’s with Japan? by David Glasner

I'm still hopeful about Abenomics.

exit strategy (Yoda Kuroda)

Nikkei Sinks Again Amid Mixed Signals From Central Bank

In Tokyo, the minutes of the Bank of Japan’s policy meeting on April 26 revealed a degree of doubt about the bank’s ability to inject a healthy dose of inflation into an economy that has suffered from crippling deflation for years. 

According to the minutes, “a few members” pointed out that the goal of 2 percent inflation appeared “difficult to achieve” in the planned time frame of about two years, “since it was highly uncertain whether changes in inflation expectations would lead to a rise in the actual rate of inflation.” 

Some board members also noted that the bank’s aggressive easing policies appeared to have been perceived by the markets as “contradictory” — comments that highlighted the challenges that the bank and policy makers are wrestling with. 

The bank, on one hand, has committed to ending deflationary expectations and starting an economic recovery by flooding the economy with money, which would cause long-term interest rates to rise. But the bank has also committed to keeping those interest rates in check, partly by buying large amounts of government bonds. That has sowed confusion among market players over whether they should welcome or worry about the recent rise in long-term rates.

Haruhiko "The Keymaster Yoda" Kuroda should say "we want long-term interest rates to remain low until we hit 2 percent inflation, with the economy running at full capacity and potential levels and with the output gap closed. This means 2 percent inflation, not runaway inflation. To prevent runaway inflation we'll allow long-term rates to rise at the appropriate time. This will contain inflation. Hope that clears things up. Market players should look for signs that the output gap is closed. That's when rates will rise. We estimate output gap closure in two years depending on the international economic context (see China, the U.S. and Europe.)"

Japan’s New Optimism Has Name: Abenomics

Is the Economy Saving Obama’s Approval Ratings? by Nate Silver

The Unemployed Need Bold, Creative Moves from the Fed by Mark Thoma