Japonia ezberdina ote? Ez, politika fiskalak funtzionatzen du

Sarrera giza, ikus Japonia: non dago inflazioa?


Bill Mitchell-en Japan is different, right? Wrong! Fiscal policy works1

(i) Japonia, sarrera: zertan datzan ‘desberdintasuna’2

(ii) The Guardian artikulua eta berorren ekonomialariak eta kazetariak3

(iii) BPG erreala (2007-2017)4

The following graph shows the growth of real GDP from the March-quarter 2007 to the June-quarter 2017. The annual growth (year-on-year) is in blue bars while the red line is the quarterly growth rate.


This is a very strong result and a testament to the on-going effectiveness of fiscal policy.

(iv) BPG eta salmenten zergak5

(v) Mitchell-en analisiak6

(vi) Kontsumo gastuak handituz7

(vii) Inbertsio gastuak handituz8

(viii) Hazkunderako laguntzak9

(ix) Kontsumitzaileen eta enpresen konfidentzia10

(x) Alokairu errealak handituz11

(xi) Bloomberg artikulua: defizitaz eta inflazioaz12

(xii) DTM eta Japonia13

(xiii) Bloomberg artikulua14

Ondorioak: (a) politika fiskalaz eta (b) politika monetarioaz

The latest national acccounts data continues to teach us lessons about monetary and fiscal policy.

We learn from the sales tax debacles and the most recent data that:

1. Fiscal policy works in both directions – trying to cut deficits when the economy is below full employment will reduce economic growth (and vice versa).

2. Monetary policy does little to stimulate real spending in a monetary economy and can not offset contractionary movements in fiscal policy. The Bank of Japan has been engaging in more quantitative easing and interest rates remain around zero – but there has so far been very little real GDP impact.

Ikus http://bilbo.economicoutlook.net/blog/?p=36631.

Ingelesez: “Japan is different, right? Japan has a different culture, right? Japan has sustained low unemployment, low inflation, low interest rates, high public deficits and high gross public debt for 25 years, but that is cultural, right? Even the mainstream media is starting to see through the Japan is different narrative as we will see. Yesterday (August 14, 2017), the Cabinet Office in Japan published the preliminary – Quarterly Estimates of GDP – which showed that the Japanese economy is growing strongly and has just posted the 9th quarter of positive annual real GDP growth. Private consumption and investment is strong, the public sector continues to underpin growth with fiscal deficits and real wages are growing. The Eurozone should send a delegation to Tokyo but then all they would learn is that a currency-issuing government that doesn’t fall into the austerity obsession promoted by many economists (including those in the European Commission) can oversee strong growth and low unemployment. Simple really. The Japan experience is interesting because it demonstrates how the reversal in fiscal policy can have significant negative and positive effects in a fairly short time span, whereas monetary policy is much less effective in influencing expenditure.

Ingelesez: “The UK Guardian article (August 15, 2017) – Japanese economy posts longest expansion in more than a decade – reported that:

Japan’s economy expanded at the fastest pace for more than two years in the three months to June, with domestic spending accelerating as the country prepares for the 2020 Toyko Olympics and low levels of unemployment encouraged businesses to invest …

The overall result was much stronger than expected by the market …

I presume that will mean the UK Guardian will refrain henceforth from publishing articles from economists or their own journalists that suggest that fiscal policy is ineffective, Japan is about to go bankrupt, Japan is about to hyper-inflate, or any other stupid claim that has been rehearsed since the early 1990s by mainstream commentators and which the likes of the Guardian have given oxygen.”

Ingelesez: “On an annual basis, Japan recorded an annual growth rate of 2.1 per cent in the June-quarter, the 9th quarter that annual growth has been positive.

The ‘sales tax’ recession of 2014 result, which was the direct outcome of neo-liberal incompetence is now well and truly behind it.

The quarterly growth rate was 1.0 per cent up from 0.4 in the March-quarter”

Ingelesez: “t is worth reminding ourselves of the folly of 2014 in Japan, which replicated the fiscal policy mistakes made in 1997.

In April 2014, the Abe government raised the sales tax from 5 per cent to 8 per cent.

After the sales tax hike, there was a sharp drop in private consumption spending as a direct result of the policy shift. At the time, I predicted it would get worse unless they changed tack.

It certainly did get worse. Consumers stopped spending and the impact of static consumption expenditure was that business investment then lags.

Here is the history of real GDP growth (annualised) since the March-quarter 1994 to the March-quarter 2015. The red areas denote sales tax driven recessions.

In both episodes, these recessions were followed by a renewed bout of fiscal stimulus (monetary policy was ‘loose’ throughout). In both episodes, there was a rapid return to sustained growth as a result of the fiscal boost.

Nothing could be clearer.

Ingelesez: “I provided detailed analysis of these historical shifts in these blogs:

1. Japan returns to 1997 – idiocy rules!.

2. Japan’s growth slows under tax hikes but the OECD want more.

3. Japan – signs of growth but grey clouds remain.

4. Japan thinks it is Greece but cannot remember 1997.

You might wonder what happened in 2002? The recession that occurred then in Japan was largely driven by an export collapse (remember the US went into recession during this period) and a tightening of net public spending. This then provoked a fall in private investment spending and a rising saving rate. It had nothing to do with the ratings decision.

Once exports recovered and public spending support resumed the economy then grew relatively strongly despite the lower sovereign debt ratings.

And then the 2007 crisis arrived.

Ingelesez: “Consumption spending growing strongly

Private consumption spending grew at 0.9 per cent in the June-quarter 2017 and by 1.8 per cent in the previous twelve months.

The following graph shows growth in private consumption spending since the March-quarter 2007 to the June-quarter 2017. The blue bars are the annual (year-on-year) outcome, while the red line is the quarterly result.

This is one of those magnificent graphs that you show students to demonstrate intervention effects of government policy. Private consumption growth was growing fairly strongly on up to the beginning of 2014, after the impacts of the GFC and the Tsunami had been overcome.

The sales tax hike had the predictable negative effect and the quarterly growth of private consumption ever since was rather subdued until confidence returned.

In the last three quarters, that confidence appears to have returned and household consumption growth has been robust.

This has been helped by strong growth in wages.”

Ingelesez: “Investment spending growing strongly

With the stronger household consumption spending and the generally better economic outlook for Japan, private capital formation is now also contributing strongly to growth.

That is a message that is often forgotten. Fiscal stimulus boosts confidence, consumers start spending, sales increase, and firms a motivated to expand productive capacity – a virtuous cycle.

These boosts are in contrast to the mainstream macroeconomics, which consistently claims that the non-government sector will cut spending if the fiscal deficit rises. It is total nonsense, of course.

The following graph shows the annual growth in private investment from the March-quarter 2007 to the June-quarter 2017.

The outlook is bright.

Part of this boost in capital formation is due to the infrastructure being built in preparation for the 2020 Tokyo Olympics. But the overwhelming influence is the brighter sales environment as consumers spend more freely.”

9 Ingelesez: “Contributions to growth

The next graph shows the contributions (in percentage points) to real GDP growth of the major expenditure categories in Japan over the last quarter and over the last 12 months (to the June-quarter 2017).

The annual results capture the impact of the introduction of the sales tax (April 2014) and its aftermath.

The major categories of expenditure that you would expect to be affected, either directly (private consumption) or indirectly (private investment) were negatively impacted.

It is also clear that over the last year, all the expenditure categories (public and private consumption, public and private capital formation, net exports) have contributed strongly to growth.

While net exports subtracted from growth in the June-quarter 2017, it boosted growth by 0.43 percentage points over the 12 month period.

The contribution of private consumption and investment is notable as is the sustained boost to growth from the public sector.”

10 Ingelesez: “Consumer and Business Confidence

The Japanese Cabinet Office publishes a – Monthly survey of Consumer Confidence. The latest results, released on August 2, 2017 (for a survey conducted in July 2017) tells us:

1. “Consumer Confidence Index (seasonally adjusted series) in July 2017 was 43.8, up 0.5 points from the previous month.”.

2. All components that influence the Consumer Perception Indices were positive:

Overall livelihood: 42.3 (up 1.2 from the previous month)

Income growth: 41.7 (up 0.1 from the previous month)

Employment:48.1 (the same as the previous month)

Willingness to buy durable goods:43.2 (up 1.0 from the previous month)

The Cabinet Office also publishes Monthly – Indexes of Business Conditions.

The latest result (August 7, 2017) showed that conditions were “Improving” in June 2017. The following graph is their latest time series (since January 2014).

Things have been looking up since mid 2016.

11 Ingelesez: “Real Wages growing steadily

The following graph shows the quarterly growth in real compensation for employees from the March-quarter 2007 to the June-quarter 2017.

With some exceptions, real purchasing power has been growing steadily since the sales tax disaster in 2014-15 was resolved with renewed fiscal expansion.”

12 Ingelesez: “I note that recently more commentators are starting to appreciate that Japan demonstrates, categorically, that mainstream macroeconomic theory is bereft and has no credibility.

A recent Bloomberg article (August 3, 2017) – Japan Buries Our Most-Cherished Economic Ideas – concludes that:

Japan is the graveyard of economic theories. The country has had ultralow interest rates and run huge government deficits for decades, with no sign of the inflation that many economists assume would be the natural result.

The “theories” should, in fact, be singular – mainstream macroeconomic theory (particularly New Keynesian economics).

13 Ingelesez: “Modern Monetary Theory (MMT) has always been able to embrace the evidential base produced by Japan.

There is no surprise to an MMT economist that:

1. Japan has large fiscal deficits relative to other nations.

2. It has relatively large gross public debt.

3. Its bond yields have been low and stable for decades.

4. It has had close to zero interest rates for decades.

5. It has low inflation.

6. It has very low unemployment.

It all comes down to understanding how the monetary system operates and the recognising capacities that a currency-issuing national government has to use fiscal and monetary to advance well-being.”

14 Ingelesez: “The Bloomberg article notes that:

Some economists think more fiscal deficits could help raise inflation. That’s consistent with a theory called the “fiscal theory of the price level,” or FTPL. But a quick look at Japan’s recent history should make us skeptical of that theory — even as government debt has steadily climbed, inflation has stumbled along at close to 0 percent

The mainstream theory doesn’t understand that fiscal deficits are no more likely to cause inflation as growth in non-government spending should the capacity of the economy be able to absorb the extra nominal spending.

If it is not capable, then there is no need to expand the deficit because the economy would already be at full employment!

But the Bloomberg journalist (Noah Smith) can see that Japan kills off mainstream economic theory, as an academic economist he still wants to hang on to it.

He claims that:

There’s just one catch — government debt.

With long-term interest rates very low and tax receipts rising due to economic growth, Japan’s mountain of government debt isn’t as bad as it appears. The government can roll over long-term bonds at increasingly low interest rates until interest payments essentially vanish. But as long as that mountain of debt remains, Japan will be forced to keep interest rates low. This situation is known as “fiscal dominance,” and it means the central bank no longer has effective control over its own monetary policy. That’s not catastrophic, but it’s not optimal. Inflation, if it ever materialized, could help erode that debt.

Which tells you that he hasn’t understood much at all.

And the terminology – “mountain of government debt” – is telling.

First, Japan’s central government debt to GDP ratio is in net terms – once you take into account the fact that the Japanese government holds huge stockpiles of financial assets – around 90 per cent.

Second, the Bank of Japan holds a significant amount of government bonds. If these are taken out the debt ratio drops to around 45 per cent

Hardly a mountain. But then who cares if the numbers were higher than this anyway? No-one should.

Japan can always meet its yen-denominated liabilities, irrespective of the interest rates. The only difference is that with low interest rates, the fiscal space is larger for non-interest payment spending.”

Iruzkinak (1)

  • joseba

    QE Japonian
    Bill Mitchell-en Bank of Japan’s QE strategy is failing
    On April 20, 1018, the IMF presented its – Asia and Pacfic Department Press Briefing – in conjunction with the release of the April 2018 World Economic Outlook and the upcoming (May 9, 2018) release of its Asia and Pacific Regional Economy Outlook. The Deputy Director of the Asia and Pacific Department, one Odd Per Brekk, told the audience that Japan should continue its Quantitative Easing (QE) program and maintain transparency in its purchase volumes so as to ensure the strategy to accelerate the inflation rate up to the 2 per cent target is achieved. Part of this strategy involves shifting inflationary expectations from their recent low levels. Critics of the program shriek that the asset base of the Bank of Japan is now approaching the nominal GDP level and given that a high proportion of those assets are comprised of Japanese Government Bonds, that reversing the strategy eventually will be difficult and risks involving the Bank is huge losses, which might render it insolvent. Insolvency has no application in the case of a central bank which can never go broke. Further, the Bank never needs to reverse the QE purchases. There is no relevance in the rising assets to GDP ratio. The problem is that QE will not achieve the desired end. The Bank has expanded its QE program significantly yet the inflation rate and inflationary expectations remain well below the 2 per cent target. They will eventually work out that the mainstream theory that predicted otherwise is erroneous.
    Mr Brekk indicated that “Japan has actually been a bright spot in the global economy over the last couple of years” and had “grown above potential for … more than two years now”.
    He said this growth was due to “external demand as well as some more fiscal stimulus than we expected”.
    He indicated that:
    The growth drivers in 2018 in Japan include private investment, which is expected to increase, also due to the Olympics in 2020. And, as I said, a favorable external environment will also likely continue to underpin solid export growth with spillovers to investment and imports.
    He also gave an assessment of “Abenomics at the five-year mark” and indicated that the fiscal strategy “has clearly delivered results in terms of incomes and employment including higher labor force participation of women and elderly workers, the strongest growth in employment record for the last two decades, if not more.”
    In terms of inflation – he noted “the gradual increase that we have been seeing in inflation over the last year or so” and that “you have to realize this was never going to be a sprint given Japan’s decades long stagnation, but rather a sustained effort to change mindsets and practices”.
    In other words, the IMF was urging the Bank of Japan to continue to maintain its huge “monetary stimulus” in order to increase the inflation rate, which is languishing at around half the Bank’s stated target.
    Mr Brekk told the press (Bloomberg) after the briefing that (Source):
    The message has to be the commitment to reaching the 2 percent inflation target and to put in place the policies needed to get there …
    Monetary policy in Japan is very much focused on changing expectations. The main challenge facing the Bank of Japan is to re-anchor inflation expectations at 2 percent … From that point of view, communication by the Bank of Japan on the commitment to stay the course is the right one …
    Moving fully to the yield curve control framework would help strengthen the message that you can sustain and that you will sustain an accommodative monetary stance.
    The reference to “moving fully” is in the context of the bank stating that it will continue to increase its Japanese government bond holdings annually by around 80 trillion yen, when in fact, in the recent past the purchasing rate has been around 50 trillion yen.
    The Bloomberg reporting of the event chose to give air to alleged:
    … worry about the sustainability of the BOJ’s policies given the 2 percent inflation target remains distant and the size of its balance sheet is approaching that of the nation’s annual economic output.
    The relevant graph that follows is the Total assets held by the Bank of Japan as a per cent of GDP (blue line) and the proportion held as Japanese Government Bonds between the March-quarter 2000 to the December-quarter 2017.
    In the December-quarter 2017, total assets stood at 94.5 per cent of GDP (and JGB holdings were 80.2 per cent of GDP).

    Why this particular statistic matters is beyond me but apparently the “critics” think it matters.
    The point of this blog post is to emphasise that it doesn’t matter one iota and that it rapid acceleration since the Bank of Japan started buying JGBs in large volumes in order to increase the inflation rate demonstrates how ineffective monetary policy is in influencing the path of the inflation rate, despite the massive increase in central bank assets.
    Inflation is still benign in Japan
    The latest data from Japan’s e-Stat service (released April 18, 2018) for the Consumer Price Index, March 2018 – shows that the:
    1. All items rose by 1.1 per cent annually but was down 0.4 per cent on the month to March 2018.
    2. Excluding the volatile items (fresh food and energy) the annual inflation rate was only 0.5 per cent and the monthly fall was 0.1 per cent.
    In other words, the annual inflation rate is still around 50 per cent of the Bank of Japan’s stated target.
    It CPI index hasn’t changed much since the mid-1990s.
    A long way to go in other words.
    The following graph shows the history of Japanese inflation since 1970.

    QE history in Japan
    The Bank of Japan’s quantitative easing history began in earnest in March 2001 (QE1) and this increased the BOJs monetary base by around 60 per cent.
    You can see that in the first graph above.
    The Bank terminated that program in March 2006, whereupon the Bank sold down its holdings (also shown in the graph).
    A second (QE2) program began in October 2010 and as time has passed it has become QE3, which is a much larger scale intervention that that began in April 2013.
    Another way of looking at the relationship between monetary policy changes in Japan and the evolution of the inflation rate is shown in the following graph. The shaded blocs are the three QE periods during the sample shown.
    I indexed the monetary base and the Consumer Price Index to 100 in January 1990.
    The graph shows the evolution of these indexes up to March 2018.
    The monetary base index was at 1200.5 in March 2018, while the CPI was at 332.7.
    The overwhelming conclusion is that there is no relationship between the evolution of the monetary base (driven by the Bank’s purchases of JGBS in large volumes) and the evolution of the inflation rate.
    One could argue that the reversal of QE1 revealed a lack of commitment by the BOJ to really drive the inflation rate up. My assessment is that QE doesn’t work whether it is extended for lengthy periods or not.
    The reversal that followed the introduction of QE2 just reduced the monetary base (and the total assets held by the BOJ).

    Inflation expectations
    The latest data on inflation expectations is also indicative that the QE policies are not having the desired effect.
    New Keynesian suggest that prices are adjusted to accord with expected inflation. With rational expectations, the mainstream models predict that inflation will respond one-for-one with shifts in expected inflation.
    The Bank of Japan has been trying to manipulate that ‘theoretical claim’ in real space through its QE experiments.
    The following graph is taken from the – Tankan Summary of “Inflation Outlook of Enterprises – the latest data being released on April 2, 2018, covering expectations up to March 2018.
    Firms are asked to assess the future price movements in output prices and consumer prices.
    The first graph shows the outlook for output prices – 1-year ahead, 3-years ahead and 5-years ahead.
    While the expectations have risen in recent months, that is more the result of increased output growth. In the early periods of QE3, the expected inflation rate for output prices fell sharply.

    The second graph shows the outlook for consumer prices – 1-year ahead, 3-years ahead and 5-years ahead. It also includes the actual inflation rate (Purple line).
    Again it is hard to see any substantial movement in consumer price expectations.

    While the Bank of Japan can accumulate JGBs in whatever volumes they choose and can never go broke if the price of those bonds in the secondary markets create “losses”, the policy will not deliver the inflationary spike that the IMF and the Bank is seeking.
    Inflation will accelerate if fiscal policy pushed the growth rate and the demand for real resources above the potential growth rate and the resource availability.
    QE is a sideshow.

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