More deflation in Japan

[Tippit]

Then you concede that the effect from merchandise trade is contractionary

It depends what the net effect is. If the currency circulates abroad then it is contractionary in terms of domestic prices. If the currency is repatriated immediately, then it isn't. Since the Yen isn't a reserve currency, I would tend to say it isn't. The US, for example, has managed to export its inflation, and that has been opportunistically contractionary for US prices.

It seems you make an elementary stock versus flow error. The effect on the income from the existing stock of net foreign assets is overwhelmingly dominant in a scenario where the yen suddenly appreciates a lot. You might as well say that after an earthquake, construction firms will be able to jack up their prices and therefore boost spending.

No, I was referring to the fact that financial assets abroad will become cheaper in real terms given a Yen appreciation, but I agree that existing foreign income will become cheaper, and I agree that this would be more influential to a Japan that is dominated by foreign investment. However, this situation, much like the cost of exports, would drive the Japanese not only to consume more domestically, but to invest more as well. In fact, this is what is happening now, as we see the Yen carry trade wind down in favor of a US dollar carry trade going forward.

While you identify the pro- and con- forces operating, you are confused about their comparative impact.

I disagree of course, and I think you've expressed a strong bias towards inflationary monetary policy as it concerns foreign exchange rates. Big surprise here. Frankly, I don't care whether exporters' costs fluctuate as a result of weakening or strengthening currency, exporters and exports make up a small percentage of any economy (roughly 9% of GDP in Japan's case, apparently). Deliberatly weakening the Yen hurts the purchasing power of people who own Yen and Yen denominated assets, period, and it hurts more people than a strong yen hurts exporters.

 

[Francesca R]

It depends what the net effect is. If the currency circulates abroad then it is contractionary in terms of domestic prices. If the currency is repatriated immediately, then it isn't. Since the Yen isn't a reserve currency, I would tend to say it isn't.

Contractionary to net (real) final demand, not prices. Net exports make a positive contribution to growth in Japan. A sharp real appreciation of the JPY reduces growth.

However, this situation, much like the cost of exports, would drive the Japanese not only to consume more domestically, but to invest more as well. In fact, this is what is happening now, as we see the Yen carry trade wind down in favor of a US dollar carry trade going forward.

As I said, it is fine if it happens incrementally and slowly. The scenario that this was about was a sudden large appreciation of the JPY--such as to USDJPY 50. Only in la-la land would that be anything but an economic crash-test.

I think you've expressed a strong bias towards inflationary monetary policy as it concerns foreign exchange rates.

No.

Deliberatly weakening the Yen hurts the purchasing power of people who own Yen and Yen denominated assets, period, and it hurts more people than a strong yen hurts exporters.

Whoever condoned "deliberately weakening the yen"? Japan has not officially dumped its currency on the market for the last 5 years. When it did it had rather little impact (the "carry trade" had far more a couple of years later, until that popped).

 

[ponderingturtle]

The problem is that the Japanese cannot "simply consume what they otherwise would have exported," because their import needs are for basic necessities like food, clothing, and fuel -- while their exports are things like cell phones and stereos, which I'm fairly confident can neither be eaten nor worn.

I am sure they are working on the latter though.

 

[GreyICE]

Ah, that's Tippit's solution for Japan. More savings. Obvious, really, when one considers the body of work he's presented in these forums.

 

[Puppycow]

Deflation continues

It's interesting that the Japanese GDP grew 4.8% in real terms but fell by 0.3% in nominal terms. 4.8% is better than expected but remember that there were negative quarters of -2.9%, -6.5%, -11.5% and -12.2% before the most recent 2 quarters of moderate growth. So the rebound is still small compared to the previous drops.

Update: It wasn't 4.8% but only 1.3%. Bleh!

IOW, the economy went splat instead of bouncing.

 

[Puppycow]

BOJ Doubles Lending Program to Combat Deflation

March 17 (Bloomberg) -- The Bank of Japan doubled a bank- loan program aimed at shoring up liquidity in the deflation- plagued economy, a boost that offsets the impact of separate credit measures expiring this month.
. . .
Today’s decision responds to price declines that are deepening even as the economy sustains a recovery from its worst postwar recession. Prime Minister Yukio Hatoyama’s administration, restrained from adding to fiscal stimulus by a record debt load, has been pushing the central bank to do more to bolster growth.
. . .
Finance Minister Naoto Kan said this month that he hopes to stamp out deflation as soon as this year, and he wants an inflation target of about 1 percent or higher. BOJ board members next month will update their growth and price forecasts in a semi-annual outlook and check quarterly household and business confidence surveys.
. . .
Consumer prices slid for an 11th month, and the gross domestic product deflator, a broad measure of prices, tumbled a record 2.8 percent in the fourth quarter. Falling prices undermine corporate earnings and make debts harder to pay off: bank lending has contracted for three straight months amid diminished demand for credit.

The BOJ’s efforts may have little impact because banks are declining to boost credit growth, Joseph Stiglitz, the Columbia University professor and Nobel laureate said in an interview in Tokyo today. The bank is suffering from a “liquidity trap” where additional injections of funds into the economy may have little impact, he indicated.

Central banks, in Japan and elsewhere, should consider ways to “make banks go back to being banks” and restart the provision of credit, Stiglitz said. Japan’s recovery has also been “impeded” by gains in the yen, and it “makes sense” for authorities to try to reduce its value, he said.

The expansion of the fixed-rate lending program may do little to spur borrowing by companies and consumers who are already enjoying lower credit costs. Yields on three-month discount bills issued by the government yesterday stood at 0.12 percent, according to Bloomberg data.

Increasing the facility is “pretty technical and will have little effect on lowering borrowing costs further,” Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo, said before the decision. Shirakawa “will probably need to make remarks that can spur expectations the bank will do more at the April meetings.”

You know, I don't think they really know what they are doing. They could end deflation if they were serious. Create new money and give it to the government to spend as stimulus money. Kill two birds with one stone: deflation and Japan's staggering debt/deficit levels.

(I'm not interested in rants about central bank money creation or that deflation is good, so don't bother Tippit.)

 

[Tippit]

BOJ Doubles Lending Program to Combat Deflation



You know, I don't think they really know what they are doing. They could end deflation if they were serious. Create new money and give it to the government to spend as stimulus money. Kill two birds with one stone: deflation and Japan's staggering debt/deficit levels.

(I'm not interested in rants about central bank money creation or that deflation is good, so don't bother Tippit.)

I never said that deflation is "good". I've said that monetary manipulation is bad, and that deflation that mirrors the rate of productivity growth (the productivity norm) is normal, and not a bad thing. The type of deflation Japan is suffering is the artificial kind which is the inevitable result of the malinvestment caused by inflationary monetary policy. Taxing currency holders and having the government waste more money isn't a real solution, since it's the free market that is inclined to supply what people in Japan really need and want. This is the true measure of a productive economy, not inflated prices.

Wow. I guess

really works!

 

[rjh01]

If a country has deflation like Japan the answer is to print money. Keep doing that until there is 0-2% inflation. The government can do what the Australian government did and give everyone a bonus, which most people spent. Kept Australia out of having a recession.

 

[drkitten]

If a country has deflation like Japan the answer is to print money.

Not quite. Printing money isn't the same as having people spend it, which is the problem in Japan (and for that matter, was a problem with Bush's stimulus plans). If I give you $1000 and you just put it in the bank, it doesn't do the economy much good. If the bank gets $1000 in deposits and doesn't lend it out, it doesn't do the economy much good.

And in an era of deflation, that's exactly what people are likely to do. Why should I spend $1000 on a new bedroom set today when I can probably buy exactly the same set next month for $950?

 

[Puppycow]

Not quite.

Is there any other way though?

Japan's government now spends twice as much per annum as it receives in taxes. Government debt is higher than Greece and second only to Zimbabwe.

So in Japan's case I would simply use the created money to pay for existing programs and sell less bonds. Selling less bonds would leave more money in the economy.

 

[drkitten]

Is there any other way though?

Sure. Stimulate consumption, or alternatively, discourage saving.

Paul Krugman had an interesting idea near the end of 2008, when Bush was pushing through another of his 'let's write rebate checks to stimulate the economy' measures. Rather than sending everyone a check for $200 or whatever it was, send everyone a gift card. The difference, of course, being that people can't simply deposit a gift card in their bank account -- they'll have to go out and spend it somewhere. Of course, the merchant can turn around and deposit it, but they'll still have to pay for the inventory and whatnot it was spent on, so eventually it will go into the producer's bank account -- only after traversing the entire consumer economy.

Artificially spiking the demand for goods should cause a modest price spike, enough to offset deflation.

Of course, it's not a perfect solution (few ideas proposed in a 300 word op-ed piece are perfect) since it would be possible to game the system. I'll use the gift card to buy the food I would have bought anyway and I'll deposit my food money in the bank account instead. But most people don't think/act that way. The effect would probably be to stimulate consumption a lot more effectively than simply "printing money."

In a country with a sensible tax policy (i.e. a VAT) you could get the same effect by simply raising the tax on savings/investment and lowering the VAT levels. If capital gains tax temporarily goes up by a percent, but VAT goes down by a percent, spending instead of saving looks better. And at least in theory this is revenue-neutral and doesn't require printing money.

 

[Puppycow]

Maybe. The Japanese are very frugal people though. They would probably spend their gift cards on stuff they would have bought anyway and save more money from their regular income. I suppose they would spend more on the margins though.

Maybe it's just that Japan is a country that can produce more than it needs, and people prefer to have a large nest egg rather than spend all their money. Combine that with persistent deflation and a clueless and complacent government, and you get what you see.

The advantage of my idea is that it would tend to counter the deflation and would help balance the budget, both good goals.

 

[shuize]

I spoke with a university professor here a few days ago who is convinced Japan will take the printing press option within the next few years.

 

[eddyjoke]

Lower prices are a good thing.

Deflation being called an evil thing by mainstream economists is in my opinion very wrong.

Deflation allows people with less income to buy more. This is a good thing.

Producers can still make more money by creating more efficient manufacturing and distribution processes.

 

[Puppycow]

Lower prices are a good thing.

Yes. If you are a consumer (we all are of course). If you are a seller though, or work for one, you receive less money for the same product or service.

Deflation allows people with less income to buy more. This is a good thing.

But deflation also means your income will be going down instead of up. I'm making less money this year than I did last year, as is the average worker here. My mortgage payment however has not been reduced. Are you willing to trade 5% lower prices at the grocery store for 5% less income but the same monthly rent or mortgage payment? Do you think that you would be better off overall?

Producers can still make more money by creating more efficient manufacturing and distribution processes.

True. Such as by hiring fewer workers and/or paying them less, and using more automation.

 

[Puppycow]

I spoke with a university professor here a few days ago who is convinced Japan will take the printing press option within the next few years.

It's hard for me to see how this can be avoided.

Nominal GDP is falling, so nominal tax revenues are too.

The amount of government expenditures covered by tax revenue is less than half. The rest is paid for by selling bonds.

I suppose that the government should actually cut the budget in line with the falling GDP, and the salaries of public employees in line with private sector wages, but I doubt they would actually do that.

 

[Puppycow]

Here's the latest budget. It goes up even as nominal GDP goes down:
Japan's ruling DPJ has record budget passed through Diet

TOKYO, March 24 (Xinhua) -- The Democratic Party of Japan's ( DPJ) fiscal 2010 budget worth a record 92.30 trillion yen (1.03 trillion U.S. dollars) cleared Japanese Diet on Wednesday.

Fresh government bonds worth a record 44.3 trillion yen (495.80 billion U.S. dollars) will be issued to fund the 2010 budget in light of tax revenues plummeting to levels not seen since 1984.

As tax revenues fall, the cost of social welfare will rise 9.8 percent, from initial forecasts for fiscal 2009, to 27.27 trillion yen (305.30 billion U.S. dollars), sources close to the matter said, adding that expenditure for public works projects will drop 18.3 percent to an allocation of 5.77 trillion yen (64.57 billion U.S. dollars), the lowest apportionment for such projects in more than 30 years.

New record-high budget, new record-high sale of bonds, flat or negative nominal GDP, no end in sight for deflation.

 

[Francesca R]

I spoke with a university professor here a few days ago who is convinced Japan will take the printing press option within the next few years.

It's hard for me to see how this can be avoided. [ . . . ]

They've been doing that for some years, since the Bank of Japan's overnight interest rate is approximately nothing, and its balance sheet has been expanding (though not so fast recently) and the monetary base has also been expanding (though not so fast recently).

They've also periodically stepped up the amount of money creation but then reduced it again later.

They could always do more. One approach is to announce a (positive) price inflation target and create money copiously until that gets achieved, but it isn't clear to them that this would help, since monetary policy first and foremost aims to maximise growth not set inflation. Proponents of this policy argue that it would, however, enable short term real interest rates to be lowered.

 

[shuize]

I thought the reason the Japanese government didn't try to inflate their way out of the problem before now was due to the large percentage of elderly living on fixed incomes.

But that, of course, is another major problem as Japan is graying at an even faster rate than the United States.

My current concern is that I don't want to buy a house here while prices are falling. But, then again, I don't want to wait until after inflation drives interest rates through the roof either.

 

[drkitten]

My current concern is that I don't want to buy a house here while prices are falling.

and there you have a one word sentence summarizing why deflation is a bad thing.

No one else does, either. So the housing industry will collapse in a sustained deflation.

As will any of the other industries where people are able to put off purchases because they don't want to pay too much for their assets.

Eventually you'll be in a position where the only industries doing well are beer and toilet paper.