>

Japan: Fiscal Stimulus Until Inflation

January 18th, 2013
in Op Ed, syndication

by Dirk Ehnts, Econoblog101

Paul Krugman notes in a column last week 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 according to Prof. Krugman:

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.

Follow up:

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:

Click to enlarge

Click to enlarge

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 2016has 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.)









Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.















Proud contributor to:


Finance Blogs
blog

Econintersect Website Search:

Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2015 Econintersect LLC - all rights reserved