How Japan avoided a bond market panic

This paper explores the history of Japanese fiscal policy over the past two decades with the aim of better understanding where previous forecasts have erred. As such, Japan provides an important case study of how a country facing intense fiscal pressures can avoid a hyperinflation or financial panic. We find that there were three key forces that likely improved Japan’s fiscal situation relative to more pessimistic predictions. First, the Japanese government has shown remarkable ability to hold down per capita expenditures on social pensions and healthcare. Second, the Japanese government has been able to raise taxes substantially. Third, the remarkable monetary policy pursued by the Bank of Japan has resulted in a dramatic decline in the amount of government bonds held by the private sector.

That is the abstract of a 2017 paper by Mark T. Greenan and David E. Weinstein.  You will note that the Japanese government just announced that the Japanese economy contracted at an annualized rate of -6.3% (not a typo) last quarter.  Of course, maybe they should have just kept on borrowing money forever.  As you can see from the recent tweet of Krugman, many of the Keynesians now favor stimulative policy all the time, even at full employment, with no need for eventual consolidation.

And the next time you see a calculation of a multiplier, ask yourself if the entire time horizon is being considered.  Usually not.

Via the excellent and reality-based Wojtek Kopczuk.