A guest post by Benjamin Cole
The Bank of Japan’s quantitative easing program has worked. Begun 13 months ago, the BoJ QE program buys about $50 billion a month in securities in an economy roughly one-half the size of the United States.
So the BoJ is going into QE with more resolve than the clay-footed United States Federal Reserve and the Federal Open Market Committee (FOMC), which have consistently wavered and quailed about inflation, instead of aggressively targeting nominal growth, level targeting.
The results in Japan?
The Nippon economy grew at a 5.9 percent annualized rate in the first quarter. Inflation is still microscopic, at 1 percent or so, excluding the effects of a recent sales tax hike. In Texas they say, “We’ll dance with what brung us,” and the Japanese economy has been brung by QE.
So again, a central bank QE program is coincident with growth, not inflation, just as in the United States in recent years (though the U.S. QE program should be much larger), and in Japan 2001-2006.
Some say Japan’s Q1 economy got a boost from pre-tax increase buying by Japanese consumers. Maybe so, but 5.9 percent is a big number, and Japan got there despite weak export sales (due in large part to the asphyxiating monetary policies of the ECB and the Fed, btw).
And remember—Japan is a nation in the grips of a 20-year-long deflationary economic Ice Age, only warmed a bit by BoJ QE efforts in 2001-2006. For the BoJ’s current QE program to work so well is remarkable.
Of course, modern day central bankers have a squeamish aversion to prosperity—and some BoJ’ers are talking already about a QE “exit” program. To his credit, BoJ Governor Haruhiko Kuroda seems steady, but the snivelers and inflation-hysterics are predictably howling.
Hideo Hayakawa, a former top BOJ economist, said the BoJ needs to clarify what it will do after the battle with deflation is won. “If 2 percent inflation comes into sight, the BOJ should taper its asset purchases,” Hayakawa, of Fujitsu Research Institute, told Reuters.
If 2 percent inflation “comes into sight”? This is what frightens central bankers these days. It is like listening to an anorexic compulsively discuss her weight.
The success of Japan’s QE program challenges another nostrum ever squawked by the Chicken Inflation Littles, and that is that every modern nation is bottlenecked by “structural impediments.”
To be sure, every economist will aver that lighter taxes and less regulation are better for economic growth, and more competition in the private sector is better, with less unionization and industry concentration. But, in fact, many nations have improved structurally in the last 50 years, including Sweden and especially the United States.
A curious historical fact: In the 1960s boom-times in America, the private-sector was heavily unionized, international trade and competition was limited; the financial, transportation and telecommunications industries were heavily regulated; and the top marginal income tax rate was 90 percent. The minimum wage was much higher than today, adjusted for inflation. You had Big Labor, Big Steel, Big Oil, The Big 3 (autos), Ma Bell. You had stodgy retailing, pre-Wal Mart, pre-Internet, pre-eBay, pre-Amazon, and pre-Craigslist, pre-China manufacturing platforms.
But the U.S. economy rocketed up, routinely posting real growth figures at or above five percent a year. If macroeconomic structural impediments are so important, then explain the 1960s. In 1965, real GDP in the United States expanded by more than 8 percent! The US economy was one large impediment in the 1960s, but it boomed like it has never since.
Back in those salad days, the Fed chief was Arthur Burns. The record will show he courted inflation and growth, and he got both. But the record also shows structural impediments did not prevent a glorious economic expansion.
Growth today is clearly asphyxiated by monetary policies, and inflation-fixated central bankers, the kind who say when 2 percent inflation can be seen on the horizon, it is time to hit the brakes.
It wasn’t always this way. The Great Inflation Fighter Paul Volcker, Chairman of the Fed 1979-1987, declared victory when inflation dipped towards 4 percent. He never called it a floor, but he was okay with it.
Now, the inflation-hysterics say 2 percent inflation is a ceiling better never approached. While cowering, the central bankers then blame “structural impediments” for glacial growth.
Central banking cannot be trusted to central bankers.