The bad economic news out of Japan: what does it mean?

Here is one version of the latest report, here is another.  People, don’t be surprised by this bad news.  Unemployment in Japan already had fallen to about three and a half percent.  So how much of a miracle could Abenomics accomplish in the first place?  Not much, not even for committed Keynesians.  Commentators have grown to expect so much of the Phillips curve these days, but still a mechanism for the output boost is required and the Phillips curve (at best) holds only in some contexts.  Japan simply hasn’t had that many laborers to put back to work.  Getting more women in the workforce, as Abe has tried to do, is a positive development, but that is not mainly about macro policy nor is it mainly about the short run.

Some of you might be thinking “well, won’t inflation cause some kind of output rise, if only by stimulating demand?”  People, there is still no mechanism specified in that sentence.  And you may recall, the 1970s and early 80s saw the rise of a bunch of “monetary misperceptions” theories, often stemming from the work of Bob Lucas, postulating something to that effect.  It was the Keynesians who slapped them down on both empirical and theoretical grounds, as intertemporal elasticities of substitution are simply not high enough to support this as a major channel of output determination.  There has been no reason since then to think those theories deserve to make a major comeback.

Here is Scott Sumner on Japan, here is Megan McArdle on Japan, and here is Edward Hugh on Japan.

I noticed a comment by Alen Mattich on Twitter:

If a mere 3 percentage point increase in taxes kills Japan’s economy, got to wonder about how that 230% of GDP debt will ever be resolved.

I’m not sure 230% is the best number there, but still that is the question of the day.  With the continuing circulation of what I call “the Venceremos mentality,” the limits of economic policy remain underappreciated, and the recent news from Japan should provide a sobering lesson for us all.


Doesn't mean much considering Japan has been in an economic funk for decades, so this was widely expected. US markets are positive. Just more evidence the US economy is exceptional thanks to American exceptionalism, strong consumer spending , QE, free markets, etc

And, Keynesian policies, rather than austerity uber alles. Don't forget where the EU is at the moment, narrowly averting a declaration of tip into recession last quarter.

Has Europe engaged in more austerity than the U.S.? Or is the difference monetary policy?

If you ask that question, it shows something about what you know or don't know.

If you are a European austerity denialist, let me point you to this long series in the FT on European austerity programs in the EU:

Maybe I am a U.S. austerity realist

Greece would be doing great right now, if only they had spent more money!

The number of homeless children in the USA is booming as well - more American exceptionalism!

This is really American exceptionalism at achieving the desired statistic. Let's take a small sample from this report:

"Using its narrower definition of homeless and its single-night PIT counting method, HUD reported a decrease in unsheltered family homelessness in 2014 and an
increase in sheltered families (HUD, 2014). However, this count does not include homeless families and children living in “doubled-up” situations with relatives
or friends—a number estimated at 75% of homeless children nationally (United States Interagency Council on Homelessness (USICH), 2014a)... The HUD PIT count also does not accurately count homeless children living in motels, hotels, trailer parks, camping grounds, or similar settings."

Okay, so "homeless" means living with a relative or in a trailer park!

I try to be a role model for kids around Sunnyvale trailer park. If some kid wants to grow dope, they can come talk to me, instead of growing dope 6 or 7 times through denial and error, they're going to get it right the first time and have some good dope.

Just another shit statistic from the shit tree randy

It's mission creep. The same hunger became food insecurity.

also more evidence of the failure of Keynesian policies, as republican economists correctly predicted in 2009

Are you talking about the US or Japan?

@ummm - more of a failure of Lucas' Rational Expectations model, or some variant thereof, did you not read TC's awesome second paragraph? The Keynesians were the good guys in that paragraph.

"Getting more women in the workforce, as Abe has tried to do, is a positive development..." The government has also just come out with a policy to increase the total fertility rate of women to 1.8. If women aren't in the workforce, and aren't having children, what are they doing? I am not trying to be snarky, I sincerely want to know.

The stats for Japan's economy and demographics are very disturbing. How will they shrink in population and pay down the massive debt all while their economy stinks?

The women were tiger moms for their kids while the men did nothing for the home.

I think the biggest contradiction is Japan needs more women in the workforce and an increase in the fertility rate. How are women going to do both?

Obviously there's a sense in which pulling Japanese women into the workforce, particularly the smart capable women capable of either being high-earners or having future high-earner kids, is eating the seed corn.

But it's hard to believe there couldn't be some modernization that would help both service the huge government debt, and encourage child-bearing. For example, making it easier to return to work after having raised children would address both concerns. I don't think most people view Japan as some kind of family paradise.

That policy would be great, but everything that has been tried in all countries has not worked. No country that has dropped below a replacement-level total fertility rate has ever climbed back above it in modern times. Or has it? I would love to know if I am wrong.

An interesting question would be to find the biggest group that has had a negative TFR, held that for at least 5 years, and then climbed back above it through some effort of their own. Has any large religious group within a state done it? Or what about an ethnicity within a region? This seems like good fodder for a research paper.

There's a great deal of TFR diversity within large diverse nations like the US. If you're monocultural you might be in trouble. Jason Collins has written on the evolutionary math behind recovery from the various technological and economic shocks to fertility.

I keep hearing that subsidies are ineffective, but then every time I actually see a subsidy, it's tiny. A while ago I argued we in the US should get rid of "married filing jointly" and move to a large, non-refundable child tax credit. $30,000 seems like a reasonable starting point. There would be numerous side benefits to this.

The dynamics of rising and falling fertility are fairly well understood. Basically we know that the post-war baby boom was mostly caused by elevated fertility among the lower classes (link at bottom). Among white Americans, fertility rose across all groups, but it rose much faster among the least educated and lowest IQ. Similarly the fertility contraction has been most pronounced among the low IQ.

Boosting fertility is a rather simple prospect. Simply assure that the bottom half of the bell curve has access to high-paying secure jobs, that pay somewhere near the same level as high-skilled workers. If unskilled workers feel that they are scraping by, i.e. that they can't attain the socially expected economic accomplishments, they'll forestall reproduction. If both doctors and janitors live in high-rise apartment blocks, then janitors won't feel bad about having kids there. But if doctors start buying suburban McMansions, then the janitors won't feel right having kids in an apartment. This is basically the opposite of the global trend towards highly competitive winner-take-all knowledge economies. Hence why we see the global decline in TFR.

France is close to a replacement TFR but not there yet. As far as I know a replacement level of 2.1 in developed countries is the required level.

Basically we know that the post-war baby boom was mostly caused by elevated fertility among the lower classes -

No, we don't know that.

Yes, we do. See statistics in link.

@Cliff: Every policy created to inflate fertility rates is a spicy stew: the pension saviour's barley, the feminist's sugar and the racist's grain of salt. A bit too idealistic for my taste.

Sureley, the 24% of the French that voted "Front-National" don't mind that a third of France's high fertility rate is provided by immigrants, right? And the feminist can live with the promotion of paternalistic structures (stay at home moms)? And of course the pension's saviour will come up with a satisfying calculation, that somehow will negate the future costs of uproductive people "raising" more kids than they would otherwise, right?

We have yet to figure out why fertility rates are falling at all. Has it to do with higher income or with longer life-spans? And to play devil's advocate: Is it a bad thing after all? Don't the decisions of so many educated, well-mannered high-earners to go chidless, do provide a good proof for why it's good?


One thing to keep in mind is that this has been done before. Wealthy Romans had a significant distaste for reproducing in the later part of the western empire's history. Spartans also had problems that contributed to their demise. One thing that seems clear, it is not matter of being too poor that is ultimately to blame.

The hope was that declining populations in certain areas would decrease the marginal cost of family formation (lower real estate prices helps newly married couples buy a cheaper house with more space to fill with more babies).

That doesn't seem to be happening.

Instead we get a retreat from the villages and ever greater crowding into dense urban areas.

The declining population of rural areas doesn't make people more likely to have children. It just makes them want to move to Tokyo.

The more immediate problem here being agricultural policies that "trap the sector in a cycle of low productivity, low profitability, and subsidy dependence." That's no way to keep people down on the farm.

Declining populations and fertility mean more elderly people. Since the elderly are own real estate and the young are buying it, they benefit from higher housing prices. Aggregate real estate prices are basically determined politically, rather than economically. Governments and central banks have demonstrated an extreme proclivity to keeping real estate prices from falling below politically unacceptable levels. Declining populations, rather than pushing down housing prices in economic equilibrium, actually result in rising prices as all the elderly demand expensive home prices.


Which also makes the prospect of a "traditional" life (married+children) less appealing to the young. This is a big problem.

Squaring this particular circle is not conceptually hard. The Japanese mode of raising children in the last half-century has been very labor-intensive and wasteful. The way you simultaneously get more women into the workforce and also increase fertility is you take a more American or European approach to the role of the mother, where the mom does not spend twenty years totally consumed with giving her children all of her attention -- you have more daycare, you have less of your educational system be mediated by the mother. Dads help out a bit more, perhaps by eating into some of the way overkill socialization with their work-group (it's hard to make an economic case for Dad having to spend so many evenings doing social events with his co-wokers -- some of that could be childcare instead, leaving Mom with a bit more time in her day).

Not to make light of what would be very difficult cultural problems to solve, but of course any change that you put on the table about female participation in the workforce and/or fertility is going to be a difficult cultural problem -- this has the benefit of being ONLY a difficult cultural problem, not a difficult cultural problem AND a difficult technological or logistical problem.

Another way to solve some of these problems is to put the grandparents to work watching the kids. My family has made extensive use of that strategy. And I have noticed other families doing the same.

"I think the biggest contradiction is Japan needs more women in the workforce and an increase in the fertility rate. How are women going to do both?"

Sex slaves?

It's a sign of defeat that their goal is a fertility rate that corresponds with a 14% population drop each generation.

It's like budget plans that call for getting the deficit to 3% or less of GDP with no hope of ever actually balancing the books.

If a publicly traded company operated like this, imagine what would happen to its stock price...

Wasn't "Japan's mighty economic engine" (McArdle) the product of, well, production, a culture that emphasized production over consumption, something that worked extremely well when other cultures (ours) emphasized consumption over production. Now that the cultures of consumption have hit something of an economic wall, cultures of production aren't doing as well. What may work here may not work there, but I'm not there I'm here so I don't know. "A few months back I very reluctantly supported the sales tax increase, as their debt situation is so scary. That was probably a mistake." (Sumner). Wisdom too often never comes, and so one ought not to reject it merely because it comes late.

@rayward -McArdle's piece is jejune, like she often is; but Sumner says he supported a sales tax increase thinking it would be used for reducing the budget deficit, when in fact it was not, and the budget deficit was increased, see his blog link at: "For some strange reason I thought". So Sumner was not wrong, just mistaken about his assumptions of what the JP government would do with the sales tax increase money.

There used to be a thing in the developing world called debt forgiveness for highly indebted poor countries. Their debt repayments were so large that they could no longer function. The IMF organised the write off in exchange for structural changes. These last were highly contentious but the debt was written off. A new group may emerge as future clients of the IMF requiring debt forgiveness called highly indebted rich countries. I don't know if Japan will be the first member of that grouping.

It won't, as most of Japanese government debt is held domestically.

Except that Japan imports almost everything so what it does internally with its debt has a bearing on how much it can buy from elsewhere with its currency.

Unemployment is a problem. Leisure time is not. If people don't want jobs, why is it admirable to put them to work?

Many have predicted that work weeks and working lives would decrease as people got richer. And yet now it is considered a positive development for people living perfectly fine lives outside of the workforce to enter the workforce.

So much for revealed preferences.

In the long run, is the ultimate supply side need is the Population willing to have children?

I doubt there is contraction. Japan has been known for awhile to "goose" GDP figures lower than they really are. The real stunner is why.

Why people follow GDP reports by the government is a mystery. They are usually revised, revised and revised over and over again.

One explanation: "The beneficiary of the incredible basket-case Japan story is obvious: Japan. The story, peddled relentlessly by ethics-challenged Wall Street analysts who will do seemingly anything to pander to Japan's authoritarian Finance Ministry, has proved almost magically effective in deflecting Western pressure for the opening of Japanese markets."

I don't see the big fuss over Japan. Their per-capita RGDP growth has not been dissimilar from other developed countries. Yes, their population is shrinking - that's not an economic issue.

A few reasons why the population shrinking is an economic problem:

1) Impossible to increase demand (or create inflation) if most of the population is past prime spending years.
2) Diminishes labor and business competition. Japanese unemployment rate is lower than the US for the last fifty years or so. And that included US unemployment in 1999!
3) If the population decreases, the public debt increases per person and especially per worker.
4) It is an indication that the population is not optimistic about the future.
5) In terms of future supply side economics, isn't the number of people the ultimate supply?
6) So far, the high government debt has been funded by high savings from trade surplus. Without as a competitive economy can they maintain the high trade surplus? The trade surplus is diminishing.

Sounds like you are an advocate of the tail wagging the dog. Japan over-indebted itself and now wants to bail itself out by promoting population growth?! Let's leave family issues to individuals and structure the economy accordingly. And if they miscalculated they will simply have to default (which in japan's case will surely be via inflation, not actual default).

@Effem - I agree. There's two things people should realize about Japan: (1) if your Total Factor Productivity is increasing, then you can have increased GDP per capita even if your population is shrinking, so the question is, is Japan's GDP per capita increasing as their labor force decreases, or not? If not, why not? (2) who is advising Japan on economic policy? All this talk makes you think they are working in a vacuum, but somebody is advising them, who? I don't think Japan is unique. The USA also will have a shrinking labor force as the Baby Boomers retire.

In short, as Japan goes, so goes the rest of the world.

It is because you have to spread a rather large cost structure over fewer earners. A nasty situation to be in if you start as a high cost producer and are already moving production else where to remain competitive.

"Some of you might be thinking 'well, won’t inflation cause some kind of output rise, if only by stimulating demand?' People, there is still no mechanism specified in that sentence." I'm confused by TC's dismissive tone. Hasn't he been respectfully linking to people making this claim for years, even though the mechanism always seemed fuzzy?

@FE - +1. I try on occasion to read and understand the history economic theory, even buying books on the same, but go nowhere. I think it's because it's really tough to say which econ model says what, and the various schools of economics, freshwater and saltwater, fight over what their models predict. Just today I learned from TC's second paragraph that the Keynesians actually shot down a 'inflation is good' argument proposed by the Rational Expectations gury R. Lucas in the 70s and early 80s, which was news to me. I think economists either practice deliberate obfuscation of their theories, so they maintain a mystique with the public, or the theories themselves are so convoluted there's no telling what they say or predict, which would be consistent with the first option, of maintaining a mystique.

TC himself wrote in his September 18, 2010 NYT column: "If the Fed promises to keep increasing the money supply until prices rise by, say, 3 percent a year, people should eventually start spending. Otherwise, if they just held the money, it would be worth 3 percent less each year. In a self-fulfilling prophecy, the Fed could stimulate spending and the economy, and at no cost to the Treasury." There wasn't a mechanism specified in that paragraph either. Is he arguing something different today? Has he changed his mind?

FE: for 6 years now, people sitting on cash have seen their purchasing power decline by the rate of inflation (1-2% per year), because short-term interest rates have been basically zero.

AFAICT, this has been a conscious strategy. After the 2008 scare, something like $3 trillion was parked in cash by the risk averse. The goal of the policy seems to be: either spend or invest that money, don't just sit on it.

Pushing inflation up to 3% would be just another turn of this screw.

Or perhaps they decide they need to save more for retirement as the real return on their savings has decreased. Seems more sensible to me than stocking up on toilet paper.

Re: limits of economic policies...

Bah, we just haven't doubled our efforts. All that's lacking is the will to make inflation real.

Inflation may not raise output but it would relieve the debt problem.

They owe it to themselves; why don't they just cancel it?

Really, I'm not sure why anybody bothers with public debt when the central bank can just print all the money the government needs.

People bother with public debt because public debt is basically a subsidy for the wealthy and the wealthy are powerful. Public debt is the basis for the "risk-free rate" of return on assets. The government not only doesn't charge a fee for property rights protection, but it protects the property rights of wealth for free and subsidizes wealth by providing a basic risk free rate of return.

The government pays for all this primarily by taxing individual incomes and wages. Something like more than 80% of its revenue comes from income and payroll taxes. It's an insidious parasitism on a massive scale.

How many generations will it take of Chinese and/or Koreans living in Japan for the former lot to become Japanese? I think the problem could be solved in 3-4 generations.

Japan has lots of third-generation born-in-Japan Koreans who are carried on the books as Korean nationality. They can apply to become Japanese citizens, but they have to speak perfect Japanese and change their name to a Japanese name.

I realize that there will be difficulties, but I cannot think of another way to solve the problem.

Actually prior to 1945, Taiwan was a colony of Japan, but predominately ethnic Chinese. Many Taiwanese took Japanese names and spoke Japanese. Those who culturally assimilated were considered fellow Japanese by most people in Japan. The relation between the ethnic Chinese and Japanese colonizers was quite congenial, and Taiwan was much more economically developed than most of mainland China. (The same cannot be said for Taiwanese aboriginals, who Japan exterminated). Imperial Japan even went to military lengths to extend itself to defend their Taiwanese countrymen against foreign occupation.

A similar process of gradual assimilation was in place in Okinawa, Korea, Manchuria, several pacific islands and eventually planned for most of East Asia. If anything the racialist component of Japanese xenophobia was more a modern post-war phenomenon. A calculated reaction to the ideology of the Greater Asia Co-Prosperity Sphere, which at its most idealistic really was pan-Asian and anti-Western/imperialist at its core.

Its not that the Japanese categorically reject anyone of non-Japanese descent. Its that Japanese culture and society have strict customs and rules. People who don't abide are generally considered tainted. This is a legacy of the Shinto religion and its focus on purity. Theoretically foreigners can become Japanese, but the difficulty of getting the behavior right makes it nigh impossible for anyone not raised in that society. Contrast to the process of becoming American, which is a much ruder, cruder culture. American society tolerates a much wider range of dress, hygiene, mannerisms and etiquette. It takes much less to not be seen classified as a barbarian, simply because we have so many home-grown native-born slobs.

Unemployment in Japan already had fallen to about three and a half percent. So how much of a miracle could Abenomics accomplish in the first place?

I am confused. "Had?" A great deal of that fall occurred after Abe was elected. I am sure that Abe would say that that was accomplished by Abenomics in the first place. Of course there is a limit, but I'm not sure when you're saying that Abenomics started. (Part of the problem, as touched on, is that Japan has a declining working-age population, so getting a positive GDP number at all is more difficult.) The consumption tax increase does seem like a mistake now, and the second hike will almost certainly be postponed. Yet what that means for their debt is, as you say, problematic.

So how much of a miracle could Abenomics accomplish in the first place? Not much, not even for committed Keynesians.

Well, then, by all means- please tell us, now, the purpose of Abenomics?

3.5% unemployment and of course, this is just "bad economic news out of Japan." Does Japan have economic problems? Yes, like any nation, but only Japan is the news almost always bad. We've been hearing "bad economic news out of Japan" for decades and we'll hear it for decades more, just like the Soviets continually heard bad economic news out of America. That's the nature of having your media be controlled by a hostile elite.

Those advocating a repudiation of Japan's domestic debt are missing the other half of the equation. One man's debt is another man's asset. If the Japanese government chooses to default on its domestic debts, it's going to impoverish millions of pensioners who will now require new handouts to survive. The loss of pension assets will drive people to increase savings, driving down consumption and stunting GDP growth. We saw that happen in America in 2008.

Now imagine what happens to the Japanese banking system once its government bonds drop in value. They'll go bust and require bailouts. How will the government pay for those bailouts? Newly borrowed money, of course.

There's no free lunch here.

What--you mean we don't just owe it to ourselves?

We owe it to each other- or more precisely, we owe it to a subset of ourselves. Important distinction to that subset.

No way they default. They inflate.

I wouldn't trust one iota of economic data from Japan. I bet they're pretending to be weak to surprise attack China.

Didn't really understand McArdle's column. She basically said that Japan has done all of this excellent policy but still has come up short. Sure, they have eased monetary policy and done the fiscal stimulus, but it seems to me the third arrow of structural reform has been either non-existent or pretty small scale. The only thing I can think of on this front they have really done is TPP, and that is still being finalized so it remains to be seen exactly how impactful it will be. Are there other notable reforms I am missing?

I live on Okinawa. I can't wrap my head around why the LDP is so obsessed with doing everything other than serious immigration liberalization in attempts to goose the economy. Japan has tons of rural space ripe for settlement (I live in some of it, but American quasi-occupation is a barrier to durable economic development here). There's obviously some limitations with respect to natural resources, but the fact that Japan shut off something like 30% of its electrical power supply without it being hugely disruptive suggests some room for growth there. Moreover, housing & transportation subsidies lead to inefficient use of the space we do have as has been pointed out on MR before, I think (basically the same tax-avoidance mechanism that leads to inefficiencies from employer-provided health insurance in the US).

I'm no economist, but I can see everyday that inflation is reducing the savings rate now that higher prices are (finally) starting to become obvious and unavoidable at the consumer level... energy costs rose immediately, but the tax hike coincided with additional price increases in consumer goods and now rents are increasing, etc. Also, Okinawa is in a relative boom thanks to increased domestic tourism (too expensive to leave Japan) and international visitors (new flights from Taiwan, Korea and China every year since Abenomics). I don't know if the benefits will outweigh the costs, but I get the feeling people are jumping the gun to say that Abenomics has had and will have little effect. This sort of subjective "eye-test" stuff only became obvious this year.

Maybe the Japanese want Japan to remain Japan.

The problem is you can either get immigrants now, or you can get them later. And right now Japan has still has a significant economic development compared to most of the world. Extrapolate growth rates fifty years, and most of the third world starts catching up to Japan. That means scraping the bottom of the global barrel. Ideally Japan could remain Japanese, but that's probably not a long-term option. So the question is would you rather import a bunch of Tamil Brahmins and Coptic Christians today, or Congolese Pygmies and Yemini Bedouins in 2060?

Sometimes its best not to play the game

The whole point of a nation-state is to exclude people not of that nation from the territory of the nation-state. The moment it fails to fulfill this most fundamental responsibility, for economic growth or whatever reason, the political leaders of that state should be tried and executed for treason.

Alright boys, you can give me 500$, or you can give me 1000$ dollars.

New York City has a huge rectangle of land in the middle of Manhattan that they have allowed to remain unused. I couldn't imagine why people would be so stupid. Imagine how many Somalis you could fit there!

No one wants a bunch of radical libertarians moving in.

Unemployment in Japan already had fallen to about three and a half percent. So how much of a miracle could Abenomics accomplish in the first place?

Here we go again.

Keynesian economics:

1. Stimulate more.
2. Check, is inflation picking up?
3. If not goto 1, if yes go to 4.
4. Stimulate less.

The goal is not so much making unemployment less but making output more. You want to fully utilize what the economy has (people and capital). Once you know you have maxed out what demand can do for you, then you are left with supply and if you find your economy is not performing as good as you would like you have to address it with supply measures.

Now of course unemployment is often used to measure whether or not we are in a recession or recovery but strictly speaking the two concepts only partially overlap and are not interchangeable. You could have recessions even in an economy with no unemployment.

I’m not sure 230% is the best number there, but still that is the question of the day.

Then stimulate by printing money, following the same pattern. If you are worried about debt that addresses it from two angles:

1. Inflation lowers the burden of debt.
2. QE and monetary stimulus involves the gov't buying debt from the market so the country literally owes less money.

5. Add magic pixie dust.

Is printing money really that hard? Is there some shortage of ink or paper the media's neglected to cover?

Lots of people have tried it, and it can go on an awful long time, but if that's all there was to it we wouldn't bother with public debt; the government could just print all the money it needs.

Japan could try evangelical christianity. It's not a panacea but it will up fertility rates. When you abstract out white evangelicals their fertility stats and general measures of sucess are pretty good. Not outstanding, not sexy, and certainly not cosmopolitan, but pretty darn good.

South Korea already has a fairly sizable evangelical contingent... and lower fertility than Japan. East Asian evangelicals for some reason don't see the same fertility boost as whites.

I must be reading Japan Realtime differently than others. For example:

"Private consumption grew an annualized 1.5%, after a drop of 18.6% in the second quarter. Weaker demand for consumer durables, such as automobiles and appliances, were behind the slow growth, indicating that consumers are still struggling to cope with the tax increase ( NB )."

Hello...I also read the Nomura Individual Investor Survey, which didn't frighten me:

If you simply read all the of Japan Realtime Posts, you will get a very clear picture of what Abe is trying to do and why the tax increases already in place were a bad idea. Earlier this summer, you could have read:

"But Tokyo share prices remain relatively robust, and some executives say recent inflation, while short of 2%, is starting to change the mindset of corporate Japan. In a more bullish interpretation, the Bank of Japan might be pumping enough cash into the economy to keep bond yields low–and simultaneously drive demand for riskier investments."

That's pretty clear to me. Here's another piece to read: Manulife Asset Management..."Abenomics: Implications for credit strategy in a Japan fixed income context" May 2014

I don't expect people to necessarily agree with what's being done by Abe, but I do think there's a coherent picture of how it would work and why tax hikes were a very bad idea, and further tax increases even worse. And don't forget, for example, Civil Servants got pay cuts in 2012. In my view of QE plus a Reinforcing Stimulus in an economic downturn, pay cuts and tax increases are both very bad ideas, and Japan has done both. But I'm with everyone who thinks that what's actually going on is on the complex side, if not outright contradictory. But we do that here as well, usually by passing bills favoring special interests that subvert each other or cancel each other out. That's been our health care problem.

I think most commentators are either misstating or misunderstanding the role of inflation. Conceptually, it's pretty simple -- we adopted fiat money because we wanted to avoid the painful deflationary spirals that characterized the pre-fiat-money order. Low levels of deflation are also somewhat harmful similar reasons, hence a low level of inflation is desirable.

Japan had a rate of inflation that was too low. A high rate of inflation is probably not helpful. A higher rate than 1% probably is helpful.

Anyways inflation is a highly subjective concept, fraught with hedonics, difficult to boil down into one number that applies to a society. So it's always going to be somewhat unclear what the ideal rate of inflation is, and that can change pretty radically from one day to the next (e.g. oil shock -- do you allow prices to rise, or do you engage in massively contractionary policy?). Like everyone else, Japan would probably do best with an NDGP target, maybe 3% growth if you're extremely pessimistic about the prospects for RGDP.

An article by Adair Turner from made me wonder if the reason behind Japan recession were to have something to do with the same cause of Germany slow down. That's, China slow down of credit-fueled expansion.

Then the Japan tax rate increase would just be kicking off at a bad moment. Yet it also implies that when China sneezes, every other country catches cold.

The measure of economic health should be GDP per capita, not GDP. With a shrinking population, Japan can have zero real growth and still have positive real GDP per capita growth.

Japan still underperforms in terms of real GDP per capita growth, but most of that is obviously explained by graying. In GDP per working-age, it's been only slightly trailing the US.

The reasons for the remaining shortfall are debatable, but I would think people here would be talking about labor rigidity.

Keep in mind that a 7.3% quarter-on-quarter annual rate contraction is about a 1.8% contraction. That is not an all an outsized reaction to a 3% general consumption tax.

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