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We have an experiment under way as the Bank of Japan holds its cool

Yesterday’s fiscal statement analysis replaced my usual Wednesday news and music blog post, so that appears today. I have hardly any time today anyway as the commitments associated with that statement are queuing up. So, today I want to reflect on the sanity in Japan and the ECB before some Duke. So we now have an experiment underway again. Most central banks are buckling under the pressure the financial markets are putting on them to raise interest rates. But the Bank of Japan, and to a lesser extent the ECB are not. We will see how that plays out. I think the Bank of Japan has its finger on the pulse and the other central banks are going down the wrong path.

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The Japanese denial story – Part 2

Here is Part 2 of my analysis of the claim that Japan is not a good demonstration of what happens when macroeconomic policies are pushed beyond their usual limits. I have long argued that trying to apply a mainstream macroeconomics (New Keynesian) framework to the Japanese situation yields nonsensical predictions about rising interest rates, accelerating inflation, rising bond yields and government insolvency. Nothing like that scenario has emerged since Japan has introduced economic policies that ran counter to the mainstream consensus since the 1990s. Japan demonstrates key Modern Monetary Theory (MMT) principles and those that seek to deny that are really forced to invent a parallel-universe version of MMT to make their case. That version is meaningless. In Part 2, we extend that analysis to consider trade transactions, the fear of inflation, and the argument that the current generation are selfishly leaving their children higher tax burdens while we party on.

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The Japanese denial story – Part 1

Well, it’s 2022 already and we enter the 18th year of this blog. Regular readers will know that I have studied the Japanese economy in considerable detail over the course of my career and when it experienced one of the largest commercial asset price bubble busts in history in early 1992, the questions I was asking and the data I was looking out were important in framing the way I have done macroeconomics since. I consider Japan to be one of the nations that was early to embrace the madness of neoliberalism – credit binge, wild property speculation then crash – and the first nation to abandon it in favour of more responsible fiscal policy – which given the circumstances required on-going fiscal deficits exceeding 10 per cent of GDP at times. Its policy approach – including the relatively high deficits, the zero interest rate policy of the Bank of Japan, and then the massive bond-buying program by the same, became the target for various New Keynesian macroeconomists (including Krugman) to prophesise doom. Their textbook models predicted the worst – rising interest rates, accelerating inflation, rising bond yields and then government insolvency as bond markets bailed out and the currency plummetted. Nothing like that scenario emerged. Japan was playing out policies that ran counter to the mainstream consensus in the 1990s and beyond and I learned so much from understanding why things happened there as a consequence. This is Part 1 of a two-part discussion about why Japan demonstrates key MMT principles and how those who wish to deny that reality have to invent a parallel-universe version of MMT to make their case.

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My Op Ed in the mainstream Japanese business media

It’s Wednesday and my blog-light day. Today, I provide the English-text for an article that came out in the leading Japanese business daily, The Nikkei yesterday on Modern Monetary Theory (MMT) and its application to the pandemic. Relevant links are provided in the body of the post. The interesting point I think is that ‘The Nikkei’ is the “the world’s largest business daily in terms of circulation” and has clear centre-right leanings. The fact that they are interested in disseminating ideas that run counter to the mainstream narrative that the centre-right politicians have relied on indicates both a curiosity that is missing in the conservative media elsewhere, and, the extent to which MMT ideas is becoming more open to serious thinkers. I have respect for media outlets that come to the source when they want to motivate a discussion on MMT rather than hire some hack to write a critique, which really gets no further than accusing MMT of being just about money printing.

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Japan national accounts – sales tax rise, growth collapses – as night follows day

In my blog post – Japan about to walk the plank – again (September 30, 2019) – I predicted that the decision by the Japanese government to increase the sales tax from 8 per cent to 10 per cent on October 1, 2010 would undermine non-government spending and growth and was totally unnecessary anyway. The government had fallen prey to the deficit terrorists who have been consistently bullying them into believing that their fiscal position is about to collapse and the bond markets would desert them. Funny that! The Bank of Japan has been buying the bulk of the public debt issued over the last several years anyway. The reality is that, given the instability of world conditions (US-China trade, European slowdown, Brexit, and, more recently, the Corona virus impacts), the Japanese government should have been increasing its fiscal deficit. Yesterday (February 17, 2020), the latest national accounts data from Japan tells us the damage that this policy folly has inflicted. Every time the Japanese government has hiked the sales tax (1997, 2014, 2019) real GDP growth has plummetted and pushed the economy into recession. In the final quarter of 2019, Japan’s growth rate slumped by an annualised 6.3 per cent, driven by a massive 11.1 per cent decline in consumption spending and capital investment decline of 14.1 per cent. Sure enough, Typhoon Hagibis was also a factor but it is undeniable that the sales tax hike was instrumental. The Spanish philosopher George Santayana had it in one when in his first volume (1905) of his book – The Life of Reason: The Phases of Human Progress – said: “Those who cannot remember the past are condemned to repeat it”.

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Q&A Japan style – Part 5b

This is the final part of a two-part discussion about the consequences of a currency-issuing government exercising different bond-issuing options. The basic Modern Monetary Theory (MMT) position is for the currency-issuing government to abandon the unnecessary practice of issuing debt (which is a hangover from the fixed exchange rate, gold standard days). Currency-issuing governments should use that capacity to advance general well-being and providing corporate welfare to underpin and reduce the risk of speculative behaviour in the financial markets does not serve any valid purpose. However, when we introduce real world layers (politics, etc) we realise that some pure MMT-type options are not possible. This question introduces just such a case in Japan. Given the political constraints, we are asked to choose between two options for central bank conduct, when the government does issue debt: (A) Buy it all up in the secondary bond markets. (B) Leave it in the non-government sector. In this final part, I go through some of the considerations that might influence that choice.

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Q&A Japan style – Part 5a

This is a discussion about Modern Monetary Theory (MMT) and the bond-issuing options for a currency-issuing government such as Japan and Australia. We will consider the three options that such a government has and discuss each from an MMT perspective. What an MMT understanding allows is a thorough appreciation of the consequences of each option. The conclusions we reach are quite different from those presented in mainstream macroeconomics, mostly due to the fact that we do not consider the bonds to be necessary to fund government spending beyond tax revenue and construct the operations of the central bank and the commercial banks to accord to the way they operate in reality rather than in the fictional world of the mainstream. This discussion also recognises the political dimensions of government rather than the technical way we often consider things in MMT. This is the first-part of a two-part answer which I will conclude on Thursday. Today, we consider the emergence of the so-called ‘reflationists’ in Japan who advocated large-scale, non-standard monetary policy in the late 1990s as a solution to the ‘Great Stagnation’ that had beset the Japanese economy.

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Japan announces a stimulus as the Right take over Bolivia

Just a short blog post today (short in research) as I devote Wednesday’s to other writing and I have to travel a lot today. More a collection of snippets that I come across over the course of a day’s work. Today, we think about Bolivia and the right-wing thugs that have overthrown a legitimate government advancing the well-being of its people. We also see senior progressive politicians falling into a myriad of lies and misconceptions about the monetary system and handing political initiative to the right wing as a consequence, even though they think they are being clever in their framing. And we think of Japan a little. And then some music offerings or two.

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Q&A Japan style – Part 4

This is the final part of my four-part Q&A series arising from my recent trip to Japan. In this post, I answer just one question. The answer goes to the heart of the relationship between the national government (finance division) and the central bank and illustrates the complexity of reserve accounting. So it needs some background by way of education. Recall that these questions about Modern Monetary Theory (MMT) were raised with me during my recent trip to Japan. The public discussion about MMT in Japan is relatively advanced (compared to elsewhere). Political activists across the political spectrum are discussing and promoting MMT as a major way of expressing their opposition to fiscal austerity in Japan. The basics of MMT are now as well understood in Japan as anywhere and so the debate has moved onto more detailed queries, particularly with regard to policy applications. So as part of my current visit to Japan, I was asked to provide some guidance on a range of issues. In my presentations I addressed these matters. But I thought it would be productive to provide some written analysis so that everyone can advance their MMT understanding.

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Some reflections on my time in Japan while I am too busy to write

Today, I have several commitments in Tokyo and then a long flight so I decided not to try to finish Part 4 of my Q&A – Japan style series and will post the final part on Monday. For today, you will have to be content with some photos from the current trip to Japan and some comments. But who are those business-suited people in Tokyo wandering around in the mornings picking up garbage (see below)? Normal transmission resumes on Monday.

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Q&A Japan style – Part 3

This is the third part of a four-part series this week, where I provide some guidance on some key questions about Modern Monetary Theory (MMT) that various parties in Japan have raised with me. Today I am in Tokyo and doing a day of press interviews and some TV filming to promote MMT within the Japanese media. I had been very clear in press interviews already (yesterday) that I hope they they represent our ideas correctly to the people of Japan. For example, at yesterday’s press conference, after my lecture in the Japanese Diet (Parliament), I said that I didn’t want any of the many journalists present to leave the room and write that ‘MMT thinks that deficits do not matter’ or that ‘MMT was about governments printing money and spending it’. I hope the message gets through. As I noted in Parts 1 and 2, many people have asked me to provide answers to a series of questions about MMT, and, rather than address each person individually (given significant overlap) I think that answering them in some depth is the more efficient way to help them to better learn and understand the essentials of MMT and real world nuances that complicate those simple principles. These responses should not be considered definitive and more detail is available via the referenced blog posts that I provide links to. Today, the question is another one about the Green New Deal and the Job Guarantee with a diversion into basic income.

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Q&A Japan style – Part 2

This is the second part of a four-part series this week, where I provide some guidance on some key questions about Modern Monetary Theory (MMT) that various parties in Japan have raised with me. I have so far given two presentations in Kyoto and today I am in Tokyo addressing an audience at the Japanese Diet (Parliament) and doing some interviews with the leading media organisations in Japan. Many people have asked me to provide answers to a series of questions about MMT, and, rather than address each person individually (given significant overlap) I think this is the more efficient way to help them to better learn and understand the essentials of MMT and real world nuances that complicate those simple principles. In my presentations I will be addressing these matters. But I thought it would be productive to provide some written analysis so that everyone can advance their MMT understanding. These responses should not be considered definitive and more detail is available via the referenced blog posts that I provide links to. Today, the questions are about the Green New Deal and the Job Guarantee.

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Q&A Japan style – Part 1

This is the first part of a four-part series this week, where I provide some guidance on some key questions about Modern Monetary Theory (MMT) that various parties in Japan have raised with me. The public discussion about MMT in Japan is relatively advanced (compared to elsewhere). Questions are asked about it and answered in the Japanese Diet (Parliament) and senior economics officials in the central bank and government make comments about it. And political activists across the political spectrum are discussing and promoting MMT as a major way of expressing their opposition to fiscal austerity in Japan. The basics of MMT are now as well understood in Japan as anywhere and so the debate has moved onto more detailed queries, particularly with regard to policy applications. So as part of my current visit to Japan, I was asked to provide some guidance on a range of issues. In my presentations I will be addressing these matters. But I thought it would be productive to provide some written analysis so that everyone can advance their MMT understanding. These responses should not be considered definitive and more detail is available via the referenced blog posts that I provide links to.

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What is the problem with rising dependency ratios in Japan – Part 2?

This is Part 2 of my blog posts on population shifts in Japan. In – What is the problem with rising dependency ratios in Japan – Part 1? (October 28, 2019) – we considered the evolution of dependency ratios in Japan as a precursor to considering the nature of problems that accompany a rising dependency ratio. The purpose is to disabuse the public debate of the idea that rising dependency ratios constitute a fiscal crisis and point to the increasing prospect of fiscal insolvency. That erroneous assertion has been used as one of the justifications for pursuing austerity policies, which damage growth, cause rising unemployment and generally miss the point. The problem with this construction is that the solution adopted by the ‘sound finance’ lobby (austerity) to their ‘non problem’ only serves to exacerbate the real problem. Today, we will consider the productivity challenge that lies at the heart of the issues a nation with a rising dependency ratio will face.

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What is the problem with rising dependency ratios in Japan – Part 1?

Later this week I will be in Japan for a series of presentations and meetings with a broad spectrum of Japanese politics. The various hosts of the events which I will confirm in Wednesday’s blog post are all committed to advancing an MMT understanding in Japan and ending the hold that ‘sound finance’ has on the public policy debates and regularly lead to poorly contrived policy shifts (such as the recent sales tax hike) in pursuit of lower fiscal deficits. As part of my preparation for my presentations I have been studying various aspects of the Japanese situation so that I can address the issues with a solid evidence base. One of the recurring themes put forward by the ‘sound finance’ lobby (which includes much of the economics profession both inside and outside of Japan) is that its ‘challenging’ demography demands that the Government move to surplus to ‘save up’ to avoid the impending fiscal disaster associated with a rising dependency ratio. This issue is not confined to Japan, of course. It is just that Japan’s demography is a little further down the ageing road than other nations. But while rising dependency ratios matter and need attention, the construction of the problem by the ‘sound finance’ lobby misses the point completely and their ‘solution’ to their ‘non problem’ only serves to exacerbate the real problem. That is what today’s blog post is about. In Part 2, I will elaborate more on the nature of the productivity challenge and some of the options that have been suggested to deal with it.

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Q & A Japanese government style – denial has no boundaries

A little bit of a different blog post format today. I mentioned in this blog post – Apparently core MMT idea is now supported by the mainstream (October 16, 2019) – that the Japanese government had taken issued a statement, by way of a formal answer to a series of questions from Japanese CDR politician Kazuma Nakatani on the opening day of the new Parliament (October 4, 2019). The Japanese government reply was not available in full at the time I wrote that but it was reported in the Japanese Media that the Government response could be summarised as “As a government, we don’t implement policy based on the idea that Japan is a successful case of MMT because its inflation and interest rates are not rising despite massive debt … We are working to restore fiscal health”. Which I thought was an interesting way of trying to deny the undeniable but also missed the point somewhat – being that MMT is not a ‘case’ but rather just provides an alternative lens to understanding the way in which modern monetary systems operate, the capacities of the currency-issuing government within those monetary systems, and the consequences of particular policy choices. In that context, over the last 3 odd decades, the Japanese government has pushed policy into new domains – large-scale central bank government bond purchases with continuous, and, at times, relatively large fiscal deficits yet has seen interest rates fall to zero and below, inflation low to negative and negative long-term bond yields. The consequences of the policy choices have been anathema to those predicted by mainstream macroeconomists. Japan has essentially defied mainstream economics and demonstrated its falsities. The only body of macroeconomic thought that gets close to explaining the Japanese situation is Modern Monetary Theory (MMT). That is why our work is being discussed at the highest levels in Japan. Anyway, today, I can present full translations of the Questions and the Government response with my annotations of that response. My translation was considerably enhanced by Kobayashi Chie and I thank her heaps for her help.

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Japan about to walk the plank – again

Japan is about to walk the plank again when it follows through on a previous government decision to increase the consumption tax by a further 2 per cent on October 1, 2019. That means it rises from 8 per cent to 10 per cent. The latest fiscal documents suggest the government is hyper-sensitive to the historical experience, which tells us that each time they have fallen prey to the deficit terrorists who have bullied them into believing that their fiscal position is about to collapse, consumption expenditure falls sharply and the government has to respond by increasing the deficit even further to compensate. But, notwithstanding their caution (as evidenced by some permanent and temporary spending measures to offset the significant loss of non-government purchasing power that will follow the consumption tax hike, the fact remains that the policy shift will be undermine non-government spending and growth and is totally unnecessary. Moreover, the main problem in Japan at present is the lack of spending overall – non-government consumption expenditure has not yet recovered from the last consumption tax hike in April 2014. So far from raising taxes, the data on the ground is telling us that they should be increasing the fiscal deficit. This is another example of a few conservative politicians, being told by unaccountable mainstream economists to introduce policies that will damage the material prosperity of the ordinary Japanese worker and their families. And when we consider that the time is approaching when the debt-servicing burden for the government is approaching negative territory, then the consumption tax hike looks even more ridiculous.

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On visiting Japan and engaging with conservative politicians

It is my Wednesday blog post and my relative ‘blog day off’. But there has been an issue I want to write briefly about that has come up recently and has become a recurring theme. I am writing today to put the matter on the public record so that spurious claims that arise elsewhere have no traction. As our Modern Monetary Theory (MMT) work gains popularity, all manner of critics have started coming out of the woodwork. There is now, quite a diversity of these characters, reflecting both ends of the ideological spectrum and places in-between. The mainstream economists and those who profess to be ‘free marketeers’ bring out their big guns pretty quickly – inflation and socialism/Stalinism. Standard stuff that any progressive proposal to use government fiscal policy gets bombarded with since time immemorial. Easily dismissed. More recently, those who claim to be on the ‘progressive’ side of the debate have become more vociferous in their attacks, sensing, I suspect, that MMT have supplanted their relevance as the defenders of the anti-neoliberal wisdom. These characters resort to all sorts of snide-type attacks ranging from accusations of anti-Semitism (which I have covered previously), siding with Wall Street, ‘America-first corporatist sycophants’ (latest ridiculous book from G. Epstein as an example), giving succour to fascists and the Alt-Right, and that sort of stuff. Today, I want to address that last claim, which recently has been raised by a number of so-called progressive critics.

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Japan again demonstrates basic errors in mainstream macroeconomic theory

It is Wednesday and a quite blog writing day for me. I have to catch a flight a bit later and finish some other things before I do that. But I receive a lot of E-mails from readers puzzled by the fact that the low-interest rate environment (even negative) has not stimulated economic activity to the point of accelerating inflation. As part of the paradigm shift that is now, finally, occurring in macroeconomic policy-making, the RBA governor Phillip Lowe continued his theme that monetary policy has basically exhausted its counter-stabilisation potential, when he made his – Remarks at Jackson Hole Symposium (August 25, 2019). He talked about the “the elevated expectations that monetary policy can deliver economic prosperity” against the reality that central banks do not have “the best lever” to manage the economy. This theme has been expressed by many central bankers now. And there is emerging research to show that the low-interest rate environment is actually achieving the opposite – reducing the inflationary pressures. This is no surprise to Modern Monetary Theory (MMT) economists. Our basic presumption is that monetary policy is an ineffective tool for modifying aggregate spending and that rising interest rates, which are designed to quell inflationary pressures, probably actually intensify those pressures through their impact on business costs. Today, I will briefly discuss a paper I read yesterday that adds to the growing research evidence on this theme.

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Japan Finance Minister getting paranoid about MMT

The debates about MMT are expanding. There are weird offerings springing up each day. I read something yesterday about how MMT is really just Marxism in disguise and therefore a plot to overthrow entrepreneurship. Well in a socialist society there will still be a monetary system! Most of the critiques just get to their point quickly – MMT is about wild printing presses undermining the value of the currency! That should summarise 25 years of our work nicely. But there are also other developments on a global scale. A few weeks ago there was a lengthy debate in the Japanese parliament during a House of Representatives Committee hearing considering whether the October sales tax hikes should continue. The Finance Minister, Taro Aso was confronted by Committee members who indicated that it was useless denying that Modern Monetary Theory (MMT) was some abstract theory that was wrong because the Japanese are already “doing it”. The Minister told the hearing that MMT was dangerous and would undermine financial markets if anyone said otherwise. An interesting discussion took place. It highlighted some key features of MMT. It also indicates that progress is being made in the process of education aimed at giving people a better understanding of how the monetary system that we live within operates.

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