Some thoughts on recent Japanese monetary policy

I would add a few points to the other discussions:

1. If I understand the announcements correctly, this is still only a two percent inflation target, so it’s not going to end in hyperinflation.  The arguments against this new policy simply aren’t that strong and there is a chance it helps.

2. Most of all, we sorely lack a better understanding of how money matters when it does matter.  Are we actually to believe that after decades of slow growth, nominal wages remain too high, even though most individuals have retired, changed jobs, died, changed job descriptions, and so on?  Wages do eventually get reset, even in sticky wage models.  The conditions of jobs change even when the nominal wage doesn’t.  So why should the notion of sticky wages be very relevant here?

2b. The rate of unemployment in Japan, last I checked, was 4.1%.  Yes, they calculate it differently than we do, and yes in their heyday they had an even lower rate of unemployment.  But still, ask yourself: just how labor market slack is there going to be?

3. An alternative is that money will boost real economic activity through a Lucas supply curve combined with a fair degree of money illusion, which is what you would expect from a longstanding deflationary environment.  Businesses will confuse nominal changes with real changes, raise output, and eventually figure out the confusion and restrict output again.  The economy does get to keep a one-time gain (probably there are positive social externalities to higher output in this setting), but it doesn’t drive an enduring recovery.

4. I should be seeing at least a dozen blog posts with titles like: “Japanese monetary policy: sticky wages or Lucas supply curve?” and the like.  I’m not.

5. The fact that the Japanese stock market has risen with the new announcements does not much impress me.  First, there is a simple story in which the inflation redistributes wealth to exporters and away from consumers, without raising longer-term living standards.  Second, stock markets will trade on many different kinds of “noise,” including surprise announcements from central banks.

6. I’ve never read a paper on the Fisher effect in Japan, but usually there is not a complete Fisher effect in most developed countries.  This policy could thus redistribute wealth from the elderly to the young, and through that (non-traditional) channel also boost economic growth.

In short, the recent developments are good news, but you shouldn’t have a great deal of confidence about their efficacy.


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