The Bank of Japan continues to demonstrate the categorical failure of mainstream macroeconomics and, conversely, ratify the core principles of Modern Monetary Theory (MMT).
President Trump banned a CNN reporter only to find his position overturned by the judicial system. Well CNN is guilty of at least one thing, publishing misleading and alarmist economic reports about Japan. In a CNN Business article last week (November 13, 2018), Japan’s economy has a $5 trillion problem, readers were told that the Bank of Japan has no “dwindling options to juice growth if a new crisis hits” because “it’s now sitting on assets worth more than the country’s entire economy”.
The real story should have been that the Bank of Japan continues to demonstrate the categorical failure of mainstream macroeconomics and, conversely, ratify the core principles of Modern Monetary Theory (MMT).
That is what the Japanese experience since the early 1990s tells us. And all the stories about special cases; cultural peculiarities, closed markets, etc that the mainstream economists wheel out when another one of their predictions about how Japan is about to sink into the sea as a result of its public debt levels, or that interest rates are about to go through the roof because of the on-going and substantial fiscal deficits; or that inflation is about to accelerate because of the massive monetary injections; and more, are just smokescreens to divert our attention from the poverty of their analytical framework.
The Japanese 10-year bond trade is called the ‘widow maker’ because hedge funds who try to short it lose big. The Japanese monetary system is my real-time, non-linear economic laboratory which allows all the key macroeconomic propositions to play out live. And MMT is never very far off the mark. Try juxtaposing New Keynesian theory against Japan, total dissonance.
The same old
At some regular interval, which I guess I could work out if I cared, the media runs a story that goes like this.
First, there is a sensational headline, which usually has some massive monetary figure listed that is so large that it befuddles the reckoning of ordinary citizens (even me) who are used to dealing in 10s not trillions.
Of course, that is the intent. Evoke fear and alarm rather than understanding.
Then the story tells us that the Bank of Japan’s balance sheet has expanded by some massive amount. Okay.
Why is that a problem?
Well hints are provided about the dangers of ‘printing money’ (none ever substantiated), it is all nod-nod, wink-wink sort of stuff.
Then the reader is usually told that the central bank risks insolvency if the bonds go south.
The disconnect in the claims is never made obvious, if the central bank is out there ‘printing’ all this money how can it go broke.
The twain is never met here!
Perhaps the journalist or Op-Ed writer hasn’t twigged to this internal inconsistency.
After all, they are just pushing through an 800-1000 word template and all the usual points have to be made. Forget logic and consistency.
Then the reader is told that the strategy hasn’t worked anyway, inflation remains low and despite low interest rates, economic activity is hardly booming, yet the disconnect between that observation and some of the more salacious claims about hyperinflation etc is also never really made.
The observation that despite considerable efforts by the Bank of Japan to kickstart its inflation rate little progress has been made tells us that monetary policy is a relatively ineffective macroeconomic tool.
Which is counter what the mainstream New Keynesian consensus tells us.
That is the real story here that escapes the journalists and commentators.
Finally, the stories usually touch on the assertion that with so much bond buying and such an enlarged balance sheet, the Bank of Japan is not capable of defending the economy from the next crisis.
And the scaremongering is complete.
The reader isn’t allowed to think that maybe fiscal policy is the main game anyway and its capacity is not impeded by past deficits or enhanced by past surpluses.
In other words, the Japanese government has all the ‘fire power’ it ever needs to respond to a non-government sector spending collapse whether it come from domestic demand or via the export markets.
It can also respond to any natural or unnatural disaster.
And so the reader turns the pages and forgets about all this until some time later when the story is recycled by some other bored journalist who has nothing better to do on that particular day.
That was what was dished up in CNN Business’s latest offering cited in the Introduction.
We read gems like:
1. “An epic bond-buying spree by Japan’s central bank means it’s now sitting on assets worth more than the country’s entire economy.”
2. “following years of money printing aimed at jump starting the country’s stagnant economy”.
3. “The years of heavy stimulus have warped parts of Japan’s financial markets and left the central bank with dwindling options to juice growth if a new crisis hits. But the splurge is unlikely to end anytime soon.”
Note the language, “warped”, “juice”, “splurge”, all loaded to make out something is wrong.
4. “Kuroda has said the bank won’t consider ending the protracted stimulus effort until that goal is reached. Risky strategy. But that may be an impossible task, and continuing the stimulus program indefinitely carries significant risks.”
Come in spinner! Just in time. These type of articles all have to quote some doom merchant from the private sector.
So we get a quote from a person with a Masters degree who has been an accountant and worked for Credit Suisse:
“There are limits to how many assets the Bank of Japan can buy.”
Yes, the bank can only buy what is for sale.
And as long as the Japanese Finance Ministry keeps running fiscal deficits and does not change the unnecessary institutional arrangement of matching those deficits with bond issuance then there will be bonds to buy.
The actual concern here from the commentator is revealed next, the fact the central bank is keeping interest rates low is “making it too hard for commercial banks to make profits.”
Negative interest rates have squeezed their margins, and the huge asset purchases have effectively killed regular trading in the once lucrative bond market.
Ah. The corporate welfare argument. They want public debt because it gives them a risk-free asset to make money from.
And, by way of finale, the restatement of the doom:
“The Bank of Japan’s ultra-loose monetary policy also leaves it with little in the way of fire power to help prop up the economy in the event of another big crisis.”
So, Japan slips into the sea … eventually. Sorry Jimi.
Data update – Japan goes on in its merry way.
Defying mainstream macroeconomic predictions, that is …
. . . Bill Mitchell