The public choice approach to monetary policy

It remains neglected, even today.  Yet Martin Fackler is on the case when it comes to Japan (or try this link):

By speeding the flood of less expensive imported products into Japan, the strong yen is contributing to a broader drop in the prices of goods and services, known as deflation, that has helped retirees stretch their pensions and savings. The resulting inaction on the yen, according to a growing number of economists and politicians, reflects a new political reality, with already indecisive leaders loath to upset retirees from the postwar baby boom who make up nearly a third of the population and tend to vote in high numbers.

‘‘Japan’s tolerance of the strong yen and deflation is rooted in a clash of generations,’’ said Yutaka Harada, a professor of political science and economics at Waseda University in Tokyo. ‘‘And for now, the seniors are winning.’’

The problem, many economists warn, is that the victory comes at a high price, mortgaging the future by hastening the hollowing out of the economy as companies move abroad, and contributing to the deflation that has already exacerbated a nearly two-decade decline in Japan. It may also, ultimately, be self-defeating, threatening the very industries that created the huge trade surpluses sustaining Japan’s still comfortable living standards.

How many major political battles do the elderly actually lose?  I get a little worried about the conflation between nominal and real, and the blurring of short- vs. long-run time horizons, but still this is a point worth making:

‘‘The strong yen robs from youth, but there is not much awareness here yet of generational inequalities,’’ said another lawmaker, Keiichiro Asao, with the opposition Your Party.


Your link does not work. This one does

Never mind, you (relative) youths will inherit lots of property from us codgers.


Good point. Tyler's comment should actually really read:

How many major political battles do the wealthy actually lose?

Removing property qualifications from voting and adoption of the income tax are two important ones, which seem unlikely to be reversed.

Depends who your codgers are. There is a lot of wealth inequality among the elderly.

True but they are the wealthiest age group, by far.

It hasn't sunk in yet obviously. There isn't anything to inherit. Japan's pension system issued bonds last week to cover their obligations. Yes, they borrowed money, They have been one of the larger purchasers of government debt for years, but now they have to draw on the savings and it isn't there. We'll see if the vaunted savings of the Japanese are still there when these folks need it for their retirement. I don't think it is.

No one ever says a strong yen helps grow a consumer culture, helps out retailers, and improves access to foreign goods and services, many of which are luxury, food, energy, and entertainment which are important to the quality of life of individuals living in Japan - of all ages. It makes it easier to travel abroad, and to attend university abroad. The strengthening yen makes it easier to borrow and means more foreigners want to invest. Further it effects the incentive for local investors to move capital abroad, since they need higher returns, and probably reduces the incentive to setup new factories overseas - factories that ultimately become a source of exporting jobs and relocation.

These articles are always so pessimistic. Toyota will build fewer factories in Kentucky, and Americans will build more KFC's in Japan.

I think your last sentence has it backward for Toyota. A strong yen means they will build more of their cars overseas because Japan would be relatively less competitive. You seem to get that with the idea of capital heading out in search of higher returns.

Likewise, you're getting the timing off on foreign investment. After the yen has (excessively) strengthened, it might be an attractive currency to borrow if you believe it will subsequently weaken. However, borrowing a strengthening currency is a great way to lose money. Foreign investment may be partly determined by currency speculation, but capital flows are likely dominated by relative interest rates (in the short term) and relative economic prospects (in the long term). If your KFC franchise in Tokyo is loss-making then the translation effect doesn't help you.

This does not look like a good explanation for Fed policy. It's not clear that older people with non-indexed pensions (and don't most people who get pensions get them from SS?) benefit mlore from low inflation and low returns on investment than they would from a vigorous recovery with the risk of some higher inflation. Even less is it evident that, benefit or not, their political weight is behind a low NGDP growth policy. I see a generational conflict much more clearly in the discussion of policies to address the long term budget trajectory.

We are Japan, indeed.

Japan is the writing on the wall. The rule of the geriatrics: "Gerontocracy".

Us youngun's should be taking notes since western Europe is not far behind, demographics-wise.

Another reason to end the central banks and allow free banking.

This does not look like a good explanation for Fed policy. It’s not clear that older people with non-indexed pensions (and don’t most people who get pensions get them from SS?) benefit mlore from low inflation and low returns on investment than they would from a vigorous recovery with the risk of some higher inflation.

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