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.
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.
The Japanese bond market has been very interesting in the last week proving yet again that private bond markets cannot set yields on government bonds if the government does want then too. Next time you hear some mainstream economist claiming a currency issuing government is running deficits at the will of the investors (read bond markets) politely tell them they are clueless. Japanese once again provides the real world Modern Monetary Theory (MMT) laboratory – every day it substantiates the underlying insights contained within MMT and refutes the core mainstream propositions. The financial media referred to the Bank of Japan as putting a whipsaw to the bond markets, which in context means that the BoJ is forcing the ‘markets’ into confusion (Source). The bond markets have misinterpreted recent Bank of Japan conduct in the JGB markets (less purchases than expected, and even missing a scheduled buy up) as a sign that the Bank was weakening on its QQE commitment from last September that it would hold the 10-year JGB yield to zero and thereby allow the longer investment rates to fall. Why they doubted that commitment is another matter but within a few days over the last week the Bank demonstrated that: (a) it remains committed to that target; and (b) it has all the financial clout it needs to enforce it; and (c) the bond market investors do not call the shots.
I read a report on the American news network CNBC the other day (November 15, 2016) – The bond vigilantes are back, and Trump better pay attention – which included some so-called experts in a video claiming to know something about bond markets. The report asserted that “bond vigilantes” might return to force the new US President to “tone down his spending” (as they allegedly did when Bill Clinton was in office). One expert said “we’ve got fiscal policy again and … the prospect of higher interest rates and inflation could even herald the return of the bond vigilantes”. Idiot is a polite term for him. The journalist and the commentators invoked should take time out and learn about what is happening in Japan, which remains the best Modern Monetary Theory (MMT) ‘laboratory’ there is. The Bank of Japan in now putting into operation the decision it took in September 2016 to buy unlimited amounts of Japanese government bonds at a fixed-yield. Which means? In short, it will control the yields across all bond maturities from 2-year out to 40-year and will set them at whatever level they choose. Oh, won’t the bond markets prevent that happening? How? For the bond markets it is a case of “like it or lump it”. Once again Japan demonstrates that mainstream macroeconomic theory is devoid of understanding.
In yesterday’s blog – Time for fiscal policy as we learn more about monetary policy ineffectiveness – I discussed, in part, the way that fiscal and monetary policy in Japan were working in a harmonious way, in contradistinction to the way these two major policy levers are working elsewhere (for example, Australia and the Eurozone). One of the results of that harmony is that the official unemployment rate in Japan has dropped to 3.1 per cent, the lowest since July 1995. I considered the willingness of the Japanese government to introduce and maintain large fiscal stimulus programs under its Prime Minister – Shinzō Abe – to be a major contributing factor in that reduction (down from 5.5 per cent in July 2009). However, a Bloomberg journalist asserts that – Japan’s Plunging Jobless Rate Is All About Aging, not Abenomics (published August 10, 2016). We can explore whether that assertion is true. It will certainly be partly true given the population ageing in Japan. That is what this blog is about today.
The latest survey data from the Bank of Japan is interesting and supports a growing awareness among policy makers that monetary policy has run its course and will have to work more closely with active fiscal policy to stimulate economic growth. These insights have been a hallmark of ideas advanced for many years now by Modern Monetary Theory (MMT) proponents (including myself). The data shows that the negative interest rate and large-scale quantitative easing programs that the Bank of Japan has been pursuing have not had their desired effect. It was clear when they were announced that they would fail to achieve their goals. I wrote about that in 2009 and 2010. But it seems that the mainstream policy debate has to be dragged kicking and screaming through a series of policy failures before any progress is made towards actual solutions that will work. The Bank of Japan Board meets later this week and I am hoping they announce their intention to work closely with the Ministry of Finance (fiscal policy) to introduce Overt Monetary Financing (OMF) where the bank provides the monetary capacity to support much larger fiscal deficits with no further debt being issued to the non-government sector. That would finally put policy on track to do something effective and productive. It would also provide some policy leadership to guide other nations towards a more prosperous future (like Britain).
I read two articles/reports today about Japan. The first was a Fairfax article (March 21, 2016) from a journalist who invariably peddles the neoliberal economic myths. The second was from the IMF extolling the virtues of higher wages in Japan. What? Yes, you read the second point correctly. The IMF considers that an essential new policy element (a “fourth arrow”) is required in Japan in the form of real wages growth outstripping productivity growth by around 2 per cent. It wants the government to legislate to ensure that happens. In general, the IMF solution for Japan is in fact one of the key changes that nations have to do bring in to restore some sense of stability into the world economy. Governments around the world has to ensure that real wages growth, at least, keeps pace with productivity growth and that workers can fund their consumption expenditure from their earnings rather than relying on ever increasing levels of credit and indebtedness. This will of course require a fundamental change in our approach to the interaction between society and economy. It will require increased employment protection, larger public sector employment proportions, decreased casualisation, and legislative requirements imposed upon firms to pass on productivity gains. It’s no small order, but it is one of a number of essential changes that we will have to do introduce as part of the abandonment of neoliberalism.
In September 2010, The Project Syndicate, which markets itself as providing the “Smartest Op-Ed Articles from the World’s Thought Leaders” gave space to Martin Feldstein – Japan’s Savings Crisis. Like a cracked record, Feldstein rehearsed his usual idiotic claims that interest rates in Japan would rise because “of the continuing decline in Japan’s household saving rate” and that “the higher interest rate would eventually raise the government’s interest bill by about 4% of GDP. And that would push a 7%-of-GDP fiscal deficit to 11%”. Then, so the story goes, “This vicious spiral of rising deficits and debt would be likely to push interest rates even higher, causing the spiral to accelerate”. At which point, Japan sinks slowly into the sea never to be seen again. It turns out that the real world is a little different to what students read about in mainstream macroeconomics textbooks. At the risk of understatement I should have said very (completely) different. Better rephrase that to say – what appears in mainstream macroeconomics textbooks bears little or no relation to the reality we all live in. Anyway, events over the last week in Japan have once again meant that this has been just another week of humiliation for mainstream macroeconomics – one of many.
This blog is really a two-part blog which is a follow up on previous blogs I have written about Overt Monetary Financing (OMF). The former head of the British Financial Services Authority, Adair Turner has just released a new paper – The Case for Monetary Finance – An Essentially Political Issue – which he presented at the 16th Jacques Polak Annual Research Conference, hosted by the IMF in Washington on November 5-6, 2015. The paper advocated OMF but in a form that I find unacceptable. I will write about that tomorrow (which will be Part 2, although the two parts are not necessarily linked). I note that the American journalist John Cassidy writes about Turner in his latest New Yorker article (November 23, 2015 issue) – Printing Money. Just the title tells you he doesn’t appreciate the nuances of central bank operations. He also invokes the Zimbabwe-Weimar Republic hoax, which tells you that he isn’t just ignorant of the details but also part of the neo-liberal scare squad that haven’t learnt that all spending carries an inflation risk – public or private – no matter what monetary operations migh be associated with it. I will talk about that tomorrow. Today, though, as background, I will report some research I have been doing on Japanese economic policy in the period before the Second World War. It is quite instructive and bears on how we think about OMF. That is the topic for today.
The economic news yesterday from Japan that the economy had contracted in the second-quarter 2015 by 0.4 per cent (Real GDP) on the back of a sharp drop in exports (-4.4 per cent) and private consumption (-0.8 per cent). The economy is 0.7 per cent larger in real terms than this time last year but that is somewhat misleading because of the 1.9 per cent decline in the June-quarter 2014 after the Government introduced its latest sale tax hike fiasco. The only positive contributors to growth in the June-quarter 2015 were inventories and the public sector (both consumption and investment). The continuing declines in real wages and pessimistic consumer expectations are undermining the capacity of the private domestic sector to sustain growth. Without the growth in public spending the quarterly decline in real GDP growth would have been much worse. It is likely that the slowdown in China is impacting negatively on Japanese exports. But with China trying to stabilise around a mean-shift downwards in its growth rate, the future for all export-led growth strategies (that have been relying on China to sustain much higher rates of growth) doesn’t look good. In the same way that China appears to be rebalancing its total output in favour of domestic spending, the same strategy should be adopted by Japan to wean itself of its reliance on continued strong growth in exports. One thing that Japan might re-assess is its – National Pension Scheme – which is not only fairly meagre in income payments but also forces workers to contribute during their working lives. Given Japan is a currency-issuing nation, it could easily increase the pension payment and reduce or eliminate the contribution, thus providing more certainty to workers in retirement.
The Wall Street Journal reported late yesterday (May 20, 2015) that – Japan’s First-Quarter GDP Growth Is Fastest in a Year. This follows the release of the latest national accounts data from the Japanese Ministry of Finance. The WSJ was like many media commentators – quick to put the best spin on the data that they could. They converted the 0.6 per cent quarterly growth figure for March 2015 into a 2.4 per cent annualised figure and pronounced a consumer led recovery. The facts tell us a different story. The biggest contributor to growth in the March-quarter was unsold inventories. Whether this is a sign of lagging sales and overly confident producers, who won’t remain in that state for long, or expectations of strengthening consumer demand, remains to be seen. On the face of it, with real wages continuing to fall and consumer expectations weak, things may not be as rosy as the “2.4 per cent annualised growth” result would suggest.
The financial press was ‘surprised’ that Japan had slipped back into recession, which just tells you that their sources don’t know much about how monetary economies operate. Clearly they have had their heads buried in IMF literature, which tells everyone that cutting net public spending will boost growth because the private sector is scared of deficits. This prediction has never worked out in the way the theory claims. It is pure free market ideology with no empirical basis. The other problem is that cutting net public spending when private spending is weak also pushed up the deficit. Back in the real world, Japan believes the IMF myths, hikes sales taxes to reduce its fiscal deficit, and goes back into recession – night follows day, sales tax hikes moderate spending, and spending cuts undermine economic growth. Kindergarten stuff really. Eventually this cult of neo-liberal economics will disappear but in the meantime while all and sundry are partaking in the kool aid, millions will be losing their jobs, poverty rates will rise and the top 10 per cent in the income and wealth distributions will continue to steal ever more real income from the workers.
Last week, Reuters put out a story (October 30, 2014) – Special Report: Tsunami evacuees caught in $30 billion Japan money trap (thanks Scott Mc for the link) – which provides an excellent demonstration of the true limits of government spending in a currency-issuing nation. The underlying principles should be understood by all as part of their personal mission to expel all neo-liberal myths from their thinking and to help them see the nature of issues more clearly. Unfortunately, the application we will talk about is sad and has tragic human and environmental consequences, but that doesn’t reduce the relevance of the example for conceptual thinking. In a nutshell, the central Japanese government has transferred some $US50 billion worth of yen to the local government to combat the destruction caused by the tsunami in March 2011. Thirty billion is unspent despite people still living in temporary housing and suffering dramatic psychological trauma as a result. Why is this happening? Doesn’t Modern Monetary Theory (MMT) tell us that a currency-issuing government can spend what it likes? Well, not exactly. What MMT tells us is that a currency-issuing government can purchase whatever is for sale in its own currency and that propensity is limited by the availability of real resources. Here is a classic demonstration of the limits of government nominal spending.
The OECD yesterday released their interim Economic Outlook and claimed that real economic growth around the world was slowing because of a lack of spending. Correct. But then they determined that structural reforms and further fiscal contraction was required in many countries, including Japan. Incorrect. The fact that they have departed from the annual release of the Outlook (usually comes out in May each year) indicates the organisation is suffering a sort of attention deficit disorder – they just crave attention and their senior officials love pontificating in front of audiences with their charts and projections that attempt to portray gravitas. No one really questions them about how wrong their last projections were or that cutting spending is bad for an economy struggling to grow. All the participants just get sucked into their own sense of self-importance because the event generates headlines and the neo-liberal deception rolls on. The OECD needs a reality check on Japan, but it isn’t the only organisation that is pumping out nonsense this week.
A regular occurrence is the prediction of doom for Japan. Some minor upturn in Japanese government bond yields or a movement in some other irrelevant financial statistic relating to the Japanese public sector sends the financial press into apoplexy. The latest signal of impending bankruptcy being bandied about relates to the rising trend in foreign holdings of short- and longer-term Japanese government debt. This trend is explained by financial markets moving into less risky assets (in this case, Japanese government bonds) as uncertainty in other markets, for example the Eurozone, remains. However, the narrative then goes that eventually these purchasers will refrain from buying Japanese government debt and with the funding from the savings of the ageing domestic population drying up, the Japanese government will run out of money. Policy response? Cut fiscal deficits immediately through a combination of tax rises and spending cuts. All of which is nonsense and if the Japanese government follows the advice – there will be a 1997-style recession and public debt ratios will just rise faster than they are at present. It is better that we now all turn to the sport’s section of whatever news you read and relax.
Last week (August 10, 2012) the Japanese Parliament approved a bill to double the sales tax (from 5 per cent to 10 per cent) over the next three years. It is a case of déjà vu. We have been there before. The economy suffers a major negative private spending shock. The government’s budget deficit increases as tax revenue collapses. The outstanding government debt rises more quickly than in the recent past. The rising government deficit supports a recovery in real GDP growth. The conservatives start shouting that the government will run out of money, that interest rates will soar and inflation surge and life as we know will end. The government raises the sales tax and cuts back spending. Real GDP growth collapses, tax revenue falls and the deficit and debt ratio continue to rise. We are back in Japan in 1997 – but the only problem is that we are playing out the same story in 2012. The reason – Japan thinks it is Greece but has forgotten about 1997.
I have been noticing that a new narrative is coming out of the financial journalists acting as mouthpieces for various politicians and neo-liberal think-tanks around the place – along the lines that we have got it wrong – the debate now is not about austerity versus growth – but, rather, it is about structural reform and freeing up markets. The austerity is just a re-alignment of the public-private mix. I find that offensive but also odd – given that private businesses are being undermined at a rate of knots by the austerity and capital formation is stagnant (thereby undermining future prosperity). But amidst all this reinvention you still read the same scaremongering and mis-information along the traditional lines – austerity is good and the hope that increased spending can help is a pipe dream.
I have very (very) little time today and I am typing this in between meetings. There was a lot of non-news today – the news that pretends to be news and full of import but which in reality is largely irrelevant and just serves to flush out more nonsensical commentary from self-importance financial analysis (mostly located in private banks). Then the non-news commentary suffocates any sensible evaluation and in some cases governments are politically pressured to change policy in a destructive manner – fuelling the next wave of non-news. Today’s classic non-news was the downgrading of Japan by Moodys. Once again, a ratings agency declares itself irrelevant.
Everyone is lining up to be the next Japan – the lost decade or two version that is. It has been taken for granted that Japan collapsed in the early 1990s after a spectacular property boom burst and has not really recovered since. The conservatives also claim that Japan shows that fiscal policy is ineffective because given its on-going budget deficits and record public debt to GDP ratios the place is still in shambles. I take a different view of things as you might expect and while Japan has problems it demonstrates that a fiat monetary system is stable and we should be careful comparing Ireland, the US or the UK to the experiences that unfolded in Japan in the 1990s and beyond.
In recent weeks I have received many curious E-mails about Japan all asking the same question – if net exports are positive and households saving are in decline, how come the budget deficit is so big? It is a good question and the answer relates to developing a good understanding of the components of the National Accounts and the way they interact. As I explain here, the private domestic sector is increasing its saving in Japan but it is all down to the corporations sitting on huge piles of retained earnings and reducing their investment. What these trends tell anyone who appreciates the way in which the macro sectors interact is that sustained budget deficits are required in Japan and any move to austerity would be disastrous.