“Easy pickings”

Sometimes I feel I´m a ‘bully’, picking on the ‘small’ boy, in this case WAPO opinion writer Robert Samuelson, who ‘pontificates’: Japan is caught in a stimulus trap:

But stimulus is supposed to be temporary. It’s supposed to “jump-start the economy.” Expansion becomes self-sustaining. In Japan, this transition never really occurred. The longest period of growth (2002-07) depended heavily on a cheap yen that revived the export model.

The United States isn’t Japan. The American economy is more flexible and entrepreneurial. The natural gas and oil boom is a godsend. Housing is reviving. Still, similarities with Japan loom. Growth rates have been stubbornly low. Both countries rely on stimulus policies — cheap credit, big deficits — to cure problems that are fundamentally structural and psychological. The parallels are worrying.

He could have looked up two charts before ‘starting off’.

Japan_1

 

Japan_2

 

This is the story:

In the second half of the eighties Japan tried to revive growth (that had dropped considerably following yen appreciation) by stepping on the monetary ‘accelerator’. Nominal spending was rising and real growth recovered. In 1989, a consumption tax was introduced (“CT”), which had the expected effect of increasing prices (‘inflation’ would only be a temporary affair).

Unfortunately, the BoJ didn´t see things in that light and decided to step rather hard on the monetary ‘brake’. Nominal spending growth dropped considerably (and stocks and real estate prices went down).

In 1997 there was an increase in the “CT” rate. ‘Inflation’ again went up. This time the BoJ stepped hard on the ‘brake’ and also pulled on the ‘handbrake’. No mystery that nominal spending (NGDP) fell and stayed lower.

Samuelson mentions the 2002-07 period of ‘growth’. Note that Japan´s QE at the time turned inflation from negative to zero, with nominal spending rising almost imperceptibly. The rest is recent history, which Mr. Shinzo Abe may or may not change.

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