Central Bankers are in a “Permanent State of Readiness”

Sounds like they all attended the same “Military Academy”!

The latest:

SENDAI, Japan—Bank of Japan Gov. Haruhiko Kuroda said he would act quickly if the yen’s rise threatens his inflation goal, highlighting his caution over exchange rates ahead of a major international convention.

“Be it exchange rates or anything, if it has negative effects on our efforts to achieve our price-stability target, and from that perspective if we figure that action is necessary, we will undertake additional easing measures,” Mr. Kuroda told reporters Thursday.

The remarks by Mr. Kuroda come at a time of tension between the U.S. and Japan over whether the yen’s appreciation seen earlier this year is sharp enough to warrant intervention by authorities. Investors are closely watching whether Tokyo and Washington will continue to clash over yen policy during a meeting in northern Japan Friday and Saturday of finance chiefs from the Group of Seven leading industrialized nations.

A few other examples picked randomly:

Dovish Draghi drives down the euro after promising more QE ‘if necessary’

As consumer debt grows, Mark Carney says ready to act ‘if necessary’

Bernanke: Fed Remains Ready To Act, If Necessary

I´m being cute. Obviously central bankers must always be ready to act. I just wish that sometimes they really did! After all, the world economy situation is in such dire straits because of, on the one hand, from some lack of action and, on the other, from some bad ones.

And going on to the G7 meeting we travel back thirty odd years to another “time of tension between the US and Japan”. In short, it seems the Yen can never depreciate against the dollar, in what is one of the most blatant cases of “currency discrimination” the world has ever known.

If you don´t believe me, believe the data.

State of Readiness

In the first half of the 1980s, the dollar appreciated a lot against all currencies, except, you guess, the Yen! To make it visually clean, the chart compares the Yen and the DM against the dollar.

When the sages gathered at the Plaza to “talk the dollar down”, then, yes, the Yen could appreciate freely!

So, Mr Kuroda, never mind “hurting” the “feelings” of Secretary Lew. Just don´t let him force on you what Secretaries Donald Regan and James Baker forced on your predecessor in the 1980s!

Japan doesn´t need a higher inflation target, but a sufficiently high NGDP Level Target

In his Bloomberg View article today, Narayana Kocherlakota writes “A Possible Cure for Japan’s Low Inflation”:

Suppose, for example, that the Bank of Japan had announced a target of 4 percent in March 2013. Actual inflation over the past three years would probably have been higher — teaching wage-setters and price-setters that if they want to avoid costly mistakes, they’d better pay attention to what the central bank says will happen. Having built up that credibility, the central bank could then more easily guide expectations to its long-run goal of 2 percent.

Before Abe, Japan had an implicit 0% inflation target. By establishing an explicit 2% target, things should have worked out as Kocherlakota argues. But they didn´t! Does that mean that if you really want 2% inflation you should target 4%? Doesn´t sound reasonable.

As the chart indicates, Japan´s problems began when the BoJ allowed NGDP to stagnate. It appears it would be much more effective for Abe/Kuroda to stipulate that the BoJ would “not rest” until nominal spending (NGDP) had reached the stated level, from which it would henceforth grow at a specified rate.


Haruhiko Kuroda Again The Globe’s Best Central Banker. FOMC Look Like Fops

A Benjamin Cole post

In Japan, the inflation rate is about 1.2% by the Bank of Japan’s alternative index, and the unemployment rate is a scant 3.1%. The stock market is up 15.1% in the last year. Capital spending by Japanese companies in Q3 was up 11.2% year-over-year.

Haruhiko Kuroda is the Governor of the Bank of Japan, and the world’s best central banker. Kuroda could wring his hands about “long and variable lags,” and curtail the Bank of Japan’s quantitative easing program, now running about $50 billion a month in an economy half the size of the United States economy. BTW, the Bank of Japan pays 0.10% interest on excess reserves.

Instead Kuroda shows steel and resolve. Read this from Nov. 30, Reuters: “Bank of Japan’s governor has dismissed calls from critics to go slow on hitting the central bank’s 2% inflation target and stressed the need to take ‘whatever steps necessary’ to achieve its ambitious consumer price goal.”

Kuroda told an audience of Toyota auto execs and others, “In order to overcome deflation—in other words, break the deadlock—somebody has to show an unwavering resolve and change the situation. When price developments are at stake, the BOJ must be the first to move.”

Contrast the stalwart Kuroda with the feeble, dithering, inflation-cowering of Chairman Janet Yellen and Vice Chairman Stanley Fischer of the U.S. Federal Reserve Board.

But first consider: The U.S. unemployment rate is 5.0%, much higher than Japan’s 3.1% rate. The core U.S. PCE inflation rate is 1.3%, about the same as Japan’s, and below target. The S&P 500 is about back to where it was a year ago, not up 15.1% like the Japan’s stock market. U.S. capital spending is weak, while Japan capital spending is strong.

While the mediocre U.S. economy compares unfavorably to Japan’s on many levels, the Fed is actually and presently tightening monetary policy. Think about it: Where Japan does $50 billion monthly in QE, the Fed is shrinking its balance sheet, or reverse QE. Where the Bank of Japan pays 0.10% IOER, the Fed pays 0.25%. And the Fed, after endless fretting, appears ready to raise rates at their Dec. 16 meeting.

So we have the U.S. central bank conducting reverse QE, raising interest rates, and paying banks not to lend through IOER. All this while the PCE price index is below target and falling, and real growth is sluggish.

Please Mr. Kuroda, come to America. We need you at our central bank.

John Taylor “celebrates” 30 years of the Plaza Accord

John Taylor:

That the dollar depreciated across the board—as much against the mark as against the yen—suggests that it was part of a general reversal of the dollar appreciation experienced during 1981-1985 due to the monetary policy strategy the Fed had put in place.  As Alan Greenspan put it in an FOMC meeting in 2000, “There is no evidence, nor does anyone here [in the FOMC] believe that there is any evidence to confirm that sterilized intervention does anything.”

The dates of the Plaza and the Louvre meetings are marked in the chart. Observe how the move toward an excessively restrictive policy starts at the time of the Plaza meeting. Indeed, as chart shows, the Bank of Japan increased its policy rate by a large amount immediately following the Plaza meeting, which was in the opposite direction to what macroeconomic fundamentals of inflation and output were indicating. Then, after a year and a half, starting around the time of the Louvre Accord, Japanese monetary policy swung sharply in the other direction—toward excessive expansion.  The chart is remarkably clear about this move. The policy interest rate swung from being up to 2¼ percentage points too high between the Plaza and the Louvre Accord to being up to 3½ percentage points too low during the period of time from the Louvre Accord to1990.

The highlighted sections denote “rubbish”. The dollar never appreciated relative to the yen in the years before the Plaza. It did so against the German DM. So you cannot say “it was part of a general reversal of the dollar appreciation experienced during 1981-1985…”

And God forbid what would have happened to the Japanese economy if between 1987 and 1990 the BoJ had followed the “Taylor-rule”! As we now know, that was the time that Japanese NGDP flattened out and Japanese real growth all but disappeared!


The fact is that Japan could never let the yen depreciate relative to the dollar. It could and should appreciate! The initial rise in the BoJ´s call rate was to make sure that happened.

The Japan story: a lesson for central bankers everywhere

A James Alexander & Marcus Nunes post

It´s a simple story of failure, but one that fits the facts.

It´s also based on a simple premise: An inflation obsession that took hold in 1974.

It´s also a story that gives credence to Market Monetarists’ recommendation that central banks should level target NGDP.

It teaches us Abe´s latest move is one that goes in the right direction.

The story is told through 3 charts.

The trigger of the process that defined the Japanese economy was the domestic inflationary impact of the first oil shock. Inflation in 1974 climbed above 20% and worries about inflation and its effects on the real economy, including the worst bout of labor unrest since the war, quickly turned price stability into a priority of economic policy. More than a “priority”, price stability became an “obsession”. This is consistent with the reaction to the introduction of the consumption tax (CT) in 1989 and the CT increase in 1997.

We should put “price stability” in scare quotes too. The Fed and other central banks increasingly seem happy to interpret this as zero inflation is acceptable, but anything over 2% a precursor to hyperinflation at worst and a return to stop-go monetary policy chaos at best.

Japan Story_1

What central bankers should recognize are that labor unrest and consumption taxes are supply shocks and the best the BoJ could have done was keep NGDP on the level path it had been on since the early 50s. The BoJ monomania on price stability led to them wanting to “eradicate” inflation, not keep it in the 0% – 5% range that held in the 20 years before the oil shock. To do that, the BoJ strongly reduced the trend growth of NGDP. Did they think that crushing inflation would somehow teach labor a lesson? Perhaps.

The new trend held until 1990, when the “tax shock” gave a very short term uptick to inflation. Thereafter NGDP trend growth has remained close to zero. Competent central banks should stay loyal to long-term inflation expectations, but seem unable to do so only when headline inflation (even if due to CT increases) is above target. If headline or even core inflation is below target they all too easily fall back on those long term, well-anchored, expectations to justify doing nothing, or worse and tightening.

The BoJ´s goal of price stability (“zero” inflation) was attained, but real growth all but disappeared as monetary strangulation took place.

Japan Story_2

Abenomics, introduced with the election of Abe in late 2012, has improved things somewhat but it´s still tied the self-defeating inflation target (not “zero” but 2%), and as the recent experience of many developed countries with targets for inflation has shown, you can easily get into a “stagnation trap”!

Japan was the first country to (implicitly) pursue an inflation target. Now it looks on the verge of being the first to pursue an (explicit) NGDP level target. Maybe it will not take as long for present day inflation targeting countries to follow suit.

Who said there´s no irony in economic policy!

PS: The Economist makes exactly that suggestion:

A target for nominal GDP (or the sum of all money earned in an economy each year, before accounting for inflation) is less radical than it sounds. It was a plausible alternative when inflation targets became common in the 1990s. A target for NGDP growth (ie, growth in cash income) copes better with cheap imports, which boost growth, but depress prices, pulling today’s central banks in two directions at once. Nominal income is also more important to debtors’ economic health than either inflation or growth, because debts are fixed in cash terms.

Abe has to provide an ETA

From the news:

Japanese Prime Minister Shinzo Abe said Thursday that he would seek to expand the nation’s economy by around a fifth, pivoting away from a month’s long fight over security legislation that hurt his popularity among voters.

“Creating a strong economy will continue to be my top priority,” Mr. Abe said during a news conference at the headquarters of the ruling Liberal Democratic Party, where he was officially appointed to another three-year term as party leader.

Mr. Abe said he would aim at increasing the size of Japan’s economy to ¥600 trillion ($5 trillion), from around ¥490 trillion in the latest fiscal year. He didn’t say exactly how or when that growth would be achieved.

As the chart shows, nominal spending in Japan has remained bottled-up for more than twenty years. The 2008 crisis depressed it further. It is also clear in the chart that Abenomics, introduced when Abe assumed the premiership in December 2012, has helped lift-up the economy, but certainly not enough to “crank” the growth engine.


Market Monetarists have for long proposed that central banks, instead of targeting inflation should establish a level target for nominal spending, or NGDP. Abe has “broken the spell”, but to be successful he has to do it right. And that means providing an estimated time of arrival (ETA) at the new target. If that is specified, the route becomes known and that provides the best guidance for all types of economic agents, allowing the Bank of Japan to closely monitor the process and enabling it to undertake timely corrective measures, i.e. quickly reset the “rudder” as soon as deviations from the path are identified.

What Monetary Policy Can and Cannot Do: Japan Edition

A Mark Sadowski post

Here’s Scott Sumner discussing the Japanese economy as an example of the Great Stagnation.

  1. 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%.
  2.  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.)

M Sadowski_Japan_1

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.

M Sadowski_Japan_2

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.

M Sadowski_Japan_3

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.