The ‘Japan Syndrome’

Earlier on, comparisons were made with the Great Depression. Now it´s all about Japan. The Economist had this piece on ‘Japanese Lessons’:

A third lesson from Japan was to seek a strong stimulus: in a growing economy, high debt need not be a problem. Take a household’s finances. A large mortgage is fine as long as breadwinners’ incomes are sufficient to pay the interest and leave some to spare. Inflation helps too, as debts are fixed at their historical values but wages should rise with inflation.

Following Japan’s example, central banks engaged in “quantitative easing” (QE), buying bonds for newly created cash (see bottom left-hand chart). This aims to drive up bond prices, lowering yields and making debt manageable. The QE programmes have been bolder than Japan’s and corporate-bond yields have indeed fallen.

I thought that all that the Japanese experience could teach had long been absorbed. After all, as far back as 1999 Bernanke had labeled Japan´s monetary policy a “Case of self-induced paralysis”.

Apparently not. In fact, it seems that the main difference between the ‘Japanese outcome’ and those of the major industrial economies is due to the specifics of the inflation target. While in Japan it appears that the desired rate of inflation is zero, in the other economies it stands around 2%.

Japan´s QE between 2003 and 2006 was geared to bring inflation to target (0%). As soon as that happened the program was ended. The charts illustrate.

And this quote from a NYT article in 2006 says it all in the most ‘chilling’ way:

TOKYO, July 14 — Economists applauded the Bank of Japan’s interest rate increase, the first in six years, as a long-awaited signal that Japan’s $4.6 trillion economy is finally getting back on track.

They said that by moving pre-emptively on Friday, long before a return of inflation is likely to become a threat, the central bank was also hoping to demonstrate that it was watching prices carefully, and was therefore up to the task of stewarding Japan’s economy, the world’s second largest after the United States.

Economists said the bank’s main concern in raising rates was restoring its own reputation after a series of policy mistakes that deepened Japan’s economic troubles during more than a decade of stagnation.

The chart below is the proper definition of Japan´s stagnation. Between 1991 and 1997, nominal spending crawls up a gentle slope. In 1997, coinciding with a spike in inflation following an increase in the consumption tax, nominal spending is curtailed! When QE became operational in 2003 nominal spending flattened.

The next charts show that there was a synchronous drop in nominal spending after mid-2008. It´s as if the most important central banks in the world had banded together and done a “one, two, three, go”!


The difference between Japan and the rest is that in Japan NGDP fell and has remained flat at the new lower level. In the other countries the slope is positive to different degrees, but nowhere steep enough to regain and ‘adequate’ trend level. In Japan target inflation is zero. In the others it is positive. Note that ‘Japaneization’ is coming fast to the EZ countries, with nominal spending flattening out quickly (and if you factor out Germany, it is declining!).

What drives the economy? Nominal spending. Who controls nominal spending? The Central Bank.


4 thoughts on “The ‘Japan Syndrome’

  1. Pingback: The ‘Japan Syndrome’ « Economics Info

  2. Excellent post by Marcus Nunes.

    Global sovereign interest rates have been heeded down for 20 years. The trend lines say we will all be in Japan-land, at zero bound, soon.

    Whatever your politics, whatever your beliefs, this means that the traditional tool of central banks fort stimulus—lower interest rates—is about as useful as a firehouse against a flood.

    Accordingly, there really is no option but to learn how to effectively use QE, hopefully within a package we call Market Monetarism.

  3. Pingback: Regime Change Rumour Mill: Osborne rejects NGDP Target | uneconomical

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