The Japan Story

A Benjamin Cole post

If you don’t like quantitative easing, then consider this: The Nikkei 225, a broad measure of Japan’s stock market, is up 45.9% in the last 52 weeks.

On May 20, official Japan reported that Q1 GDP was up 2.4% YOY.

This is good news for Japan, a nation nearly moribund from 1992 through 2012, when so encrusted in deflation it managed but scant growth of 1 percent annually. In that pair of lost decades, the Japan stock market lost about 80% of its nominal value, as did property values. The nation became deeply indebted, as it tried fiscal stimulus to revive. The yen soared in value against the U.S. dollar.

The twenty years after 1992 were a debacle for Japan, a long real-world experiment that savages the folly that deflation and a strong currency are economic cure-alls.

Congratulations are in order to the current Bank of Japan, led by the courageous Governor Haruhiko Kuroda, who has shown resolve, so unlike the indecisive, feeble troupe who gaggle together at the Federal Open Market Committee, the lugubrious policy-making board of the U.S. Federal Reserve.

In contrast to the stop-and-go FOMC, BoJ’er Kuroda has been buying $80 billion in bonds a month since 2013, and has said he would do more if necessary to hit his 2% inflation target.

And yes, ordinary Japanese are benefitting too: “Wage growth is now positive, ending years of wage deflation,” Christopher Mahon, of Baring Asset Management recently told Barron’s. Mahon says buy Japan.

If I have criticism for the BoJ, it is that they should have a nominal GDP target, not an IT—more on that later.

QE in the U.S.

When finally the Fed did try to right kind of QE—QE3, which was open ended, results dependent—QE worked in the United States too. After peek-a-boo with QE 1 and QE2, the Fed in September of 2012 said it would buy $40 billion a month, and later upped that to $85 billion a month, until conditions improved. That policy roughly worked (although note that BoJ is buying $80 billion of bonds a month in an economy half the size of the U.S. economy).

Yet unlike the BoJ stalwarts, the FOMC folded up their QE tents when inflation was still below target, ending QE3 in October, 2014. Thus, the FOMC sent a signal to Wall Street and markets everywhere: seeking robust economic growth is not worth risking inflation even close to 2%.

Since the Fed quit QE, the DJIA has drifted sideways for fleeting gains, while the first half 2015 may be flat in terms of GDP growth, with just a little bad luck.

The U.S. is in the same “stall speed” that defined Japan for two decades.

And For What?

The Fed is obsessed with a nominal index of prices, the PCE deflator.

But as Martin Feldstein pointed out recently in the The Wall Street Journal, government indices of inflation are imprecise, and may read a few percent high. The Fed may have the nation in Japan-style deflation now.

Feldstein then lectured that government policies should be growth-oriented, more so than today.

Amen—I hope the Fed is listening. And watching. Watching Japan, that is.

And the IT? Well, Marcus Nunes is right, as he recently blogged: The Fed should actually target nominal GDP. But if they would even have the resolve to hit the IT they have, or preferably one a bit higher, that would be an improvement.

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