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.

Abe NGDPT

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.

Fiscal deficits continue to be the best advice!

A recent example from Simon Wren-Lewis:

 …I would much prefer additional public investment, for which there is a strong microeconomic as well as macroeconomic case. [1] Michael Spence [2] is one of a huge list of eminent economists, which includes Ken Rogoff, who think additional public investment across the OECD would be beneficial.

We should continue to urge governments to recognise this, but we also have to accept the awkward fact that they are not listening. In political terms, the need to reduce deficits trumps pretty well anything else. (Perhaps things are turning in the US, but until the Republicans start losing power I’m not counting chickens.) One of the many depressing things about the Conservative election victory in the UK is that it looks like deficit obsession is an economic strategy that can win, as long as the austerity is front loaded, which is why Osborne fully intends to do it all over again.

Why, then, did Japan not grow for the last quarter century despite doing all sorts of public investments (even building an airport over water) and running persistently very high public deficits?

Appealing to the opinion of “eminent economists” is not evidence. In 1981 a list of 364 British economists, many of them “eminent” signed a letter saying that the Howe budget would “destroy” Britain. It certainly didn´t, quite the opposite happened!

What did happen in Japan to offset any fiscal stimulus was a very tight monetary policy (don´t confuse that with high interest rates). In fact, interest rates were essentially zero. Just look at what happened to nominal spending (NGDP) after 1990. No growth and even sometimes contraction.

SWL Advice

After something has been dormant for so long it´s hard to make it move up, despite the best efforts being made by Abe and Kuroda!