This category focuses largely on matters pertaining to Japan

Kyoto Report No. 1

This Tuesday report will provide some insights into life in Kyoto for a westerner in the age of Covid. The city is the old capital of Japan and was spared from the nuclear devastation that ended the Pacific War in 1945 because some US politician decided it was too culturally important to the Japanese (Source). It is a large city (1.5 million residents) nestled in a valley and surrounded by rather high mountains to the north, east and west. I am living near the Yoshida campus of Kyoto University, one of the best higher degree institutions in the world. My house is just near the – Kamo River – which runs north and south through the eastern side of the city.

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Two diametrically-opposed approaches to dealing with inflation – stupidity versus the Japanese way

Well things are going to get messier with the decision yesterday by the OPEC+ cartel to significantly reduce the oil supply and push up prices. On the one hand, when OPEC was first formed and pushed prices up, while there was significant disruption to oil-dependent nations, the substitution that followed (home oil heating abandoned, larger cars replaced by smaller cars, etc) was ultimately beneficial. So given that we need less cars on roads and less kms travelled by cars, one might consider the move to be fine. But given the way the central banks and treasury departments around the world are behaving at present, the short term impacts of the OPEC+ decision will be very damaging. How citizens endure whatever extra inflationary pressures that might emerge will depend on the fiscal and monetary policy responses. We have two diametrically opposed models: the one that most nations are following (hikes and austerity) versus the Japanese approach. I explain the difference below and predict that the latter will deliver much better outcomes for the people.

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Off to Japan I go

Today, I am skipping my Japanese language class and heading to the airport. I am taking up a position at Kyoto University under a JSPS Invitational Fellowship. I am working with the team in the Resilience Unit there on a project studying the design of fiscal policy for building national resilience using Modern Monetary Theory (MMT) principles. Resilience is an important part of the degrowth and deep adaptation agenda and I will spend some months there working on with other researchers. The – Japan Society for the Promotion of Science (JSPS) is ‘Japan’s sole independent funding agency dedicated to the advancement of science’ and is overseen by the Ministry of Education, Culture, Sports, Science and Technology. I am very privileged to receive one of the invitations. So from tomorrow I will be in Kyoto and depending on commitments my blog posts might be a little less regular although I think I will be able to continue the usual output. Now, it is time to put my Tuesday languages class into action – along with Google translate! Some travelling music follows.

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The Japanese wage problem

I read a lot about Japan. It has interested me since the early 1990s commercial property collapse and the subsequent fiscal and monetary policy measures that the Japanese government deployed to deal with it, which took policy settings outside the bounds that mainstream economists could cope with. These economists predicted the worst based on mindless extrapolations of their ‘theoretical’ models, which are really incapable of dealing with the real world in any meaningful way. Their worst didn’t come and some 3 decades later, with policy settings still at ‘extreme’ levels compared to the way mainstream economists think (and the policy makers are not budging it seems), Japan continues to demonstrate why New Keynesian macroeconomics is inapplicable and why Modern Monetary Theory (MMT) has traction. And while Japan provides first-class public transport, health and education systems, a viable housing policy, good urban systems, and has maintained low unemployment rates even during the GFC and the pandemic, there is one feature that is troublesome – the flat lining wages growth over the last 20 years. I have been very interested in learning the reasons for this phenomenon, which sets Japan apart from most other nations (who have also experienced low wages growth – but not that low). I plan to work on this aspect, in part, when I move to Kyoto next month for an extended stay.

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Why has Japan avoided the rising inflation – a more solidaristic approach helps

A few years ago, various policy makers, but mostly central bankers were keen to disabuse anyone of the notion that they were ‘doing’ Modern Monetary Theory (MMT). Some were aggressive in denial, such as US Federal Reserve boss Jerome Powell, who on February 26, 2019 announced to the US Senate Banking Committee that MMT was ‘just wrong’. There was a general pile on from other central bankers and commentators. No way, they were doing MMT. Okay, they were right, one doesn’t ‘do’ MMT, given it is an analytical framework (see below). But, curiously, now, the commentators are falling over themselves claiming that MMT is dead in the water given that it has been tried over the course of the pandemic to date and failed because inflation is out of control. Hilarious really. But what is interesting is Japan (as always). And I wonder whether any of these MMT critics now have considered why the Bank of Japan has not followed the lead of the other central banks that are rushing to exacerbate the temporary inflation spike by deliberately creating unemployment. It seems that there are different paths that policy makers can take within a capitalist monetary economy. They can allow corporations to profit gouge at the expense of the workers and then turn on the workers (creating unemployment) or they oversee a system where all parties (workers and corporations) take real income hits as a result of imported price pressures and wait it out. Japan is in the second category to its credit.

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We have an experiment under way as the Bank of Japan holds its cool

Yesterday’s fiscal statement analysis replaced my usual Wednesday news and music blog post, so that appears today. I have hardly any time today anyway as the commitments associated with that statement are queuing up. So, today I want to reflect on the sanity in Japan and the ECB before some Duke. So we now have an experiment underway again. Most central banks are buckling under the pressure the financial markets are putting on them to raise interest rates. But the Bank of Japan, and to a lesser extent the ECB are not. We will see how that plays out. I think the Bank of Japan has its finger on the pulse and the other central banks are going down the wrong path.

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The Japanese denial story – Part 2

Here is Part 2 of my analysis of the claim that Japan is not a good demonstration of what happens when macroeconomic policies are pushed beyond their usual limits. I have long argued that trying to apply a mainstream macroeconomics (New Keynesian) framework to the Japanese situation yields nonsensical predictions about rising interest rates, accelerating inflation, rising bond yields and government insolvency. Nothing like that scenario has emerged since Japan has introduced economic policies that ran counter to the mainstream consensus since the 1990s. Japan demonstrates key Modern Monetary Theory (MMT) principles and those that seek to deny that are really forced to invent a parallel-universe version of MMT to make their case. That version is meaningless. In Part 2, we extend that analysis to consider trade transactions, the fear of inflation, and the argument that the current generation are selfishly leaving their children higher tax burdens while we party on.

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The Japanese denial story – Part 1

Well, it’s 2022 already and we enter the 18th year of this blog. Regular readers will know that I have studied the Japanese economy in considerable detail over the course of my career and when it experienced one of the largest commercial asset price bubble busts in history in early 1992, the questions I was asking and the data I was looking out were important in framing the way I have done macroeconomics since. I consider Japan to be one of the nations that was early to embrace the madness of neoliberalism – credit binge, wild property speculation then crash – and the first nation to abandon it in favour of more responsible fiscal policy – which given the circumstances required on-going fiscal deficits exceeding 10 per cent of GDP at times. Its policy approach – including the relatively high deficits, the zero interest rate policy of the Bank of Japan, and then the massive bond-buying program by the same, became the target for various New Keynesian macroeconomists (including Krugman) to prophesise doom. Their textbook models predicted the worst – rising interest rates, accelerating inflation, rising bond yields and then government insolvency as bond markets bailed out and the currency plummetted. Nothing like that scenario emerged. Japan was playing out policies that ran counter to the mainstream consensus in the 1990s and beyond and I learned so much from understanding why things happened there as a consequence. This is Part 1 of a two-part discussion about why Japan demonstrates key MMT principles and how those who wish to deny that reality have to invent a parallel-universe version of MMT to make their case.

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