A Mark Sadowski post
Here’s Scott Sumner discussing the Japanese economy as an example of the Great Stagnation.
- In the 1st 4 quarters of Abenomics (i.e. 2013), RGDP grew by 2.4%, which we now know was a flat out boom. Inflation rose into positive territory and the unemployment rate fell from 4.3% to 3.7%.
- From the 4th quarter of 2013 to the 2nd quarter of 2015 the Japanese economy grew by a grand total of 0.1%. And the unemployment rate continued to fall, from 3.7% to 3.4%. That’s right, over the past 6 quarters the Japanese economy has been growing at above trend. But that blistering pace can’t go on forever. The unemployment rate is down to 3.4%, and unless I’m mistaken there is a theoretical “zero lower bound” on unemployment that is even more certain than interest rates. The Japanese economy is like a Galapagos tortoise that has just sprinted 20 meters, and needs a long rest.”
Let’s take a look at the ten quarter moving average of RGDP growth in Japan. All data comes from the Japanese Cabinet Office. (Pre-1994 data using 68SNA values has been chained to post-1994 data using 93SNA values.)
It’s true, RGDP growth has only averaged 0.86% in the last ten quarters, which is nothing remarkable, even when compared to the low bar set by the average performance of the Japanese economy since 1993. (Also, keep in mind that virtually all of that real growth took place in the first four quarters of Abenomics.)
However, let’s look at the GDP implicit price deflator.
Hmm, the GDP implicit price deflator has averaged 1.42% in the last ten quarters which is the highest rate since 1993Q2. Of course this might be due to the fact that the consumption tax was raised from 5% to 8% in April 2014, except that the consumption tax was also raised from 3% to 5% in April 1997 and that didn’t lead to a sustained increase in GDP implicit price deflator inflation.
There’s one way to settle this. Let’s look at NGDP growth.
Yep, NGDP growth has averaged 2.27%, which is the highest rate since 1993Q3. That’s clearly not due to the consumption tax increase (that is, unless your model predicts that tax increases will be expansionary).
So it looks like the current round of Japanese QE has led to the greatest sustained increase in NGDP growth and GDP implicit price deflator inflation in 22 years, but it has only had an ephemeral effect on RGDP growth.
Where have I heard something like this before? Here’s Scott Sumner in 2011.
Just to be clear, it is quite possible (likely in my view) that Japan could get another 2% of RGDP by switching to a 3% NGDP target. But it would be a one-time gain, as their labor market got less rigid. Unemployment might fall to 2% or 3%, but trend growth shouldn’t change.
That sounds like an astute prediction to me.