Posts about monetary policy

RBA rate hikes – ideology triumphing over evidence and reason

In some respects, we are back to where we were in 2021 when the supply constraints that arose from the COVID lockdowns and widespread illnesses started to reveal themselves in escalating prices around the world. This time it is the US-Israel folly in the Middle East that is the culprit and the supply constraints are largely confined to energy, specifically oil (and its derivative products). And like the COVID inflation, the current inflationary pressures will prove to be transitory and will dissipate as soon as Trump gets bored and decrees his folly is over. It is irresponsible to adjust monetary policy, which will have long-term consequences, to deal with a short-term blip, especially when the causes of that blip are not sensitive to interest rate changes. When the RBA hiked interest rates again they knew they could not justify it based on the energy cost rises. Everyone knows these cost rises are temporary. So the RBA resorted to “capacity constraints” and ‘rising expectations’ to justify their action yet provided no robust evidence to support these assertions. It was ideology triumphing over reason. Just what we have come to expect from our central bank.

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US economy on an unstable knife edge at present

The income and wealth inequality that continues to grow in most advanced nations has led to some new terminology being introduced into the lexicon of economic terms, the – K-shaped economy: When growth moves in two different directions. When this pattern of growth is identified you know how far out of kilter the world has become. Essentially, for most people, times are so tough that even essential goods and services become so expensive that even non-discretionary spending starts to take a hit. Yet, for the top-end-of-town, with the high wealth and high incomes, who are boosted by rising central bank interest rates and rising asset prices (financial and real estate etc), their spending goes crazy as the Porsches roll out the showroom door at an increasing rate. The K-pattern relates to the less well-off heading south and the rich and high income cohorts heading north in terms of prosperity and capacity to consume. The latest data from the US, which exemplifies this trend more than most countries, given its massive inequality, clearly demonstrates this phenomenon.

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Interest rate hikes will not get ships moving through the Strait of Hormuz more quickly

Regular readers will know that I hate the term NAIRU – or Non-Accelerating-Inflation-Rate-of-Unemployment – which is a concoction invented by mainstream economists to maintain unemployment at elevated levels (to keep the working class in its place) and give cover to central banks to run monetary policies that redistribute income from poor to rich. If you search through my archives you will find many posts about this abomination. I am guessing with all the supply disruptions at present as a result of the illegal invasion of Iran, central bankers will start claiming interest rates will have to rise to curb the inflation. They will dress these claims up in some economic sophistry and the official speak will talk about NAIRUs and excessive demand pressures. Yet, in reality, there is no such justification. The rate rises will not get ships moving through the Strait of Hormuz more quickly, just as they did not get factories back to work during the early COVID period. Here is some analysis to support my point.

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Those who invoke the ‘Truss Moment’ should look at what is happening in Japan

In the annals of ruses used to provoke fear in the voting public about government deficits, central bank currency issuance, and fiscal activism, the experience of Germany in the 1920s was a long-standing favourite, that could be wheeled out on demand and have immediate effect. Wheelbarrows full of money being pushed to the local bakery to buy the daily bread, etc. It was a very effective vehicle for advancing the interests of the ruling class because it created a political brake on government action to reduce poverty and maintain full employment. More recently, Zimbabwe became the vehicle. It was equally effective even though it, like the Weimar ruse, was largely based on fiction. Even more recently, we have a new ‘ruse on the block’, the so-called ‘Truss Moment’, which is particularly effective in the UK. The current Labour government is petrified to do anything that might resemble a Labour government because they have a deep-seated paranoid ideation that the ‘City’ is out to get them, and the ‘Truss Moment’ is used as the summary event that apparently justify that delusion. They might have looked to the East, to Japan, to see why the ‘Truss Moment’ was about something quite different to the popular narrative that accompanies the mention of the ill-fated few months in British politics.

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RBA bows to financial market pressure and boost bank profits at the expense of low-income mortgage holders

The Reserve Bank of Australia (RBA) increased the policy rate by 0.25 points on Tuesday and claimed that it was because the inflationary outlook was in danger of accelerating out of control as a result of excessive demand pressures. This followed last week’s CPI release which showed the December increase to be 0.96 points. When we examine that increase more closely, we find that 97.6 per cent of the December rise in the All Groups CPI was due to ‘Holiday travel and accommodation’ (most associated with Xmas and the one-off Ashes cricket series) – 70.9 per cent was due to International holiday travel and accommodation and 26.6 per cent due to Domestic holiday travel and accommodation. It is nigh on impossible to construct that as an economy that is ‘bursting at its seams’, notwithstanding all the lurid contributions from the RBA cheer squad in the media, who seem to spend their professional lives repeating press releases from organisations like the RBA, without giving them any due diligence. The reality is the RBA has bowed to pressure from the financial markets and rewarded the demands for higher rates from bank economists, who work for institutions that profit from such rises. Such is the state of macroeconomic policy in Australia.

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Japan goes to an election accompanied by a very confused economic debate

These notes will serve as part of a briefing document that I will send off to some interested parties in Japan. Japan is about to go to the poll for a snap national election on February 8. The recently installed Prime Minister, Ms Takaichi is betting that her recent solid showing in the polls will allow her to capture more seats in the Diet and reduce or even eliminate her dependency on the ‘uncomfortable’ coalition partner, the Japan Innovation Party (JIP) aka Ishin. That coalition was formed after Mr Ishiba, the previous PM, also bet on a snap election result, which saw the ruling Liberal Democratic Party (LDP) go backwards (losing 68 seats) and the coalition partner Komeito also lose seats. Together the ruling coalition lost its majority in the National Diet (for the first time since 2009) and Shigeru Ishiba’s popularity began to evaporate. The background to that loss was a major political funding scandal among the Cabinet ministers and the election result signalled that the Japanese people had seemingly had enough of the corruption at the top. Ms Takaichi took over after Mr Ishiba could no longer sustain his position as PM. The old coalition between the LDP and Komeito fell apart because the Buddhist Komeito could no longer stomach the new PMs imperialist ideology nor her unwillingness to deal with he insidious corruption in her party. This forced Ms Takaichi to forge a new coalition – hence the rather unlikely pairing with Ishin, which is a right wing populist party espousing neoliberal economic policies. The government is proposing a major fiscal expansion but the debate during the campaign that is now underway is very confused. The confusion arises because all the main players keep wheeling out mainstream economic arguments that tie them up into nonsensical policy proposals.

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Video – Japan at a Crossroads: Fiscal Policy, China, and the Growth

I have limited time today to write a blog post and last night I was sent a new video that I recently recorded with my research colleague at Kyoto University, Professor Fujii where we talk for some hours on the topic – Japan at a Crossroads: Fiscal Policy, China, and the Growth. It was a conversation we had via Zoom that was recorded on Friday, December 5, 2025. We reflect on recent developments in Japan and its relationship with other major countries (US, China, etc) and consider the policy challenges facing the new Takaichi Cabinet. It is a very long session. The transcript was generated by YouTube AI I believe and then edited and is not perfect. A lot of unnecessary aspects are edited out and the latter part of the transcript is really just an AI summary. But I think the record is acceptable. At times, the discussion changed from English to Japanese, where there was some ambiguity in terminology etc, and those segments have been cut from the transcript. I put in timestamps during the transcript to help you zoom into topics of interest. I hope you find something useful in our long discussion.

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Corporate welfare is rife in Japan’s banking sector

I am travelling a lot today so I am typing this up in between segments. I met a journalist in Tokyo on Friday and we discussed various matters relating to the current policy debate in Japan. In addition, we discussed the latest situation for the Japanese banking sector and the fact that they are recording record levels of net profits almost across the board, but particularly for the three mega banks, and it might surprise readers when they learn the source of those profits. It is actually quite scandalous but demonstrates the bind that the Bank of Japan now finds itself in – of its own doing, while being cheered on by mainstream economists, several of which are probably receiving lucrative consulting income from the very same banks.

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IMF comes late to the party but then cannot quite admit it

In an early blog post – Inflation targeting spells bad fiscal policy (October 15, 2009) – I outlined prior research that I had done on the issue of inflation targetting (IT). In my 2008 book with Joan Muysken – Full Employment abandoned – we provided further analysis on the issue. We found that there was no significant difference in inflation and output dynamics between IT and non-IT nations. This was consistent with the evidence from other studies. Mainstream economists continually claim that IT delivers a range of virtues and central banks that implement IT use interest rates hikes aggressively when there is a hint of price pressure emerging. The latest evidence from an IMF study is that there was no significant difference between IT and non-IT nations in the recent inflationary episode. The research exposes IT for what it is – an article of ideological faith rather than an evidence-based and responsible policy approach.

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Japan – the challenges facing the new LDP leader

This will be a series of blog posts where I analysis the period ahead for Japan under the new LDP leadership of Ms Sanae Takaichi. The motivation is that on November 7, 2025, the research group I am working with at Kyoto University will be staging a major event at the Diet (Parliament) Building in Tokyo where I will be one of the keynote speakers. The strategic intent of the event is to outline a new policy agenda to meet the challenges that Japan is facing in the immediate period and the years to come. It is highly likely that the Lab Director here at Kyoto, who promotes and Modern Monetary Theory (MMT) perspective and was formerly the special advisor to the Shinzo Abe, will return to that position under Ms Takaichi. This gives the event increased importance for outlining an Modern Monetary Theory (MMT)-based perspective. Today, I examine the inflation issue in Japan.

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