Posted by: Dirk | January 14, 2013

Japan: fiscal stimulus until inflation

Paul Krugman notes in his column today that Japanese authorities plan to increase government spending until inflation results and expect that they still have to pay zero interest rates on government bonds. Here is the main issue:

Enter Mr. Abe, who has been pressuring the Bank of Japan into seeking higher inflation — in effect, helping to inflate away part of the government’s debt — and has also just announced a large new program of fiscal stimulus. How have the market gods responded?

The answer is, it’s all good. Market measures of expected inflation, which were negative not long ago — the market was expecting deflation to continue — have now moved well into positive territory. But government borrowing costs have hardly changed at all; given the prospect of moderate inflation, this means that Japan’s fiscal outlook has actually improved sharply. True, the foreign-exchange value of the yen has fallen considerably — but that’s actually very good news, and Japanese exporters are cheering.

The example of Japan is noteworthy, but I would argue that policy makers in the Western world ignored both Japan and Argentina quite successfully over the last couple of years. Here are GDP growth and inflation for Argentina:

argentinainflation argentinagdp

It seems that inflation levels of 5-10% haven’t hurt Argentina at all. I think that even if Japan would be success #2 for those arguing that more inflation helps the economy would not change the mood of Western policy makers. Inflation is bad, and setting the interest rate so that inflation expectations are well-anchored still rules the thinking of those in power. That the (movement of) price level determines not only inflation but also the external account is knowledge that has been lost.

That knowledge would help Europe tremendously, since there the deficit countries would really need more demand from the center, which is Germany. German authorities, however, see inflation as evil. Speaking of which: the petition with the White House “to secure resources and funding, and begin construction of a Death Star by 2016” has been put down. Nice try. (I guess, somewhere in the comments a MMTer must have pointed out that “to secure resources” and “funding” is actually the same thing and therefore it would not make sense to use both terms.)



  1. Let me submit a quote from the book titled “Indispensable Bad Debt” published in 2008 in the USA;
    “We hate inflation but amazingly this is a situation where moderate inflation can save us… finally it is through inflation and corresponding wage adjustment that will prevent the imminent recession or if recession occured it will end as a result of the same action.” (Page 49)

  2. I’m not too familiar with Argentina’s demographics, but in Japan I would imagine that the large population of elderly would be particularly against a policy of higher inflation. Given the politics and Abe’s history, I doubt that Japan will actually pursue anything more than short-term stimulus.

  3. I think that after 20 years of crisis with basically zero interest rates and zero growth the elderly are not in a position where everyone listens to them. If the pie doesn’t grow, you have a problem. I guess the elderly understand that, too. Per capita GDP growth in Japan looks not as bad, by the way.

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