Can fiscal stimulus save Japan? monetary stimulus?

But it’s very unlikely that fiscal stimulus would ever come to the rescue, at least in the sort of quantity that would be needed. Japan’s national debt soared in the 1990s and 2000s, and yet their NGDP actually fell over two decades (1993-2013)—the worst performance by NGDP for a developed country in world history. If even Japan’s huge deficits were not enough to boost AD at all, just imagine getting a future GOP Congress to do what it takes. In my view we need a conversation about changing the Fed’s target, to a new target which makes the zero bound much less of a problem—something like NGDPLT.

That is from Scott Sumner, and I very much agree.

I have a simple rule of thumb.  If a discussion of Japanese fiscal policy notes that unemployment now is about 3.3%, it might be an interesting discussion.  Otherwise, it is just assuming that lots of aggregate supply can be pulled forth…out of nothing.  Not to mention they still need to pay all of that debt back.

By the way, here are some rumors that the BOJ may indeed move to a form of ngdp targeting.  And (same link, by the excellent David Keohane) here is from a report from Jeffries:

Currently, the Bank of Japan is buying just over Y80 trillion of JGBs per annum or the equivalent of three times to the rate of JGB issuance. The BoJ is approaching a shortage of JGBs for the central bank to buy, as commercial banks, pension and insurance funds have run down their holdings. Indeed, an IMF working paper that we quoted in the Japan 2016 outlook ‘Portfolio rebalancing in Japan: Constraints and Implications for Quantitative Easing’ that given the collateral needs of banks and the asset-liability management constraints of insurers there is a natural limit to JGB purchases.

The next step, according to this analysis, is to get/keep rates down low, convert the current debt stock into perpetual zero coupon bonds, and then have outright debt monetization by the Bank of Japan, all at low rates of inflation of course.  This may not stimulate output much, but perhaps it will stave off eventual bankruptcy.


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