Bank of Japan continues to show who has the power

Its been around 9 months since the central banks of the world (bar Japan) started to push up interest rates. This reflected a return to the dominant mainstream view that fiscal policy should aim to support monetary policy in its fight against inflation and thus be biased towards surpluses, while central banks manipulated interest rates to deal with any inflationary pressures. The central banks would somehow form a ‘future-looking’ view that inflation was about to spring up and they would push rates up to curb the pressures. The corollary was that full employment would be achieved through price stability because the market would bring the unemployment rate to a level consistent with stable inflation. So full employment became defined in terms of inflation rather than sufficient jobs to meet the desires of the workforce. This is the so-called NAIRU consensus that has dominated the academy and policy makers since the 1970s. During the pandemic, it was abandoned and there was hope, particularly after statements made by the US Federal Reserve that this approach had unnecessarily resulted in elevated levels of unemployment for decades, that central bankers would target low unemployment as well as price stability. Progressive economists, of course, rejected the whole deal, noting that monetary policy shifts created uncertain distributional outcomes (creditors gain, debtors lose when rates rise) and also rising interest rates add to business costs which provoke further price rises. Anyway, after a short respite from this pernicious NAIRU logic, we are back to square one with central banks pushing up rates. The Bank of Japan is now standing, again, in the wilderness, resisting this logic and demonstrating how government should deal with the sort of pressures being felt around the globe. And who isn’t happy? The grandstanding financial markets who thought they could make a quick buck but have come up against an ideology that rejects their claim to dominance. That is a happy story.

Bank of Japan stuns financial markets – again!

There was disbelief last week among financial markets over the Bank of Japan’s decision to leave their policy settings unchanged.

One Twitter hero who keep pronouncing Modern Monetary Theory (MMT) dead (he seems obsessed with our work) also wrote recently that the major play in financial markets now is pressuring the Bank of Japan to change policy and come into line with the rest of the world.

He seems to think that it is the financial market greed merchants who rule the show and can force the policy makers in Japan to cower in fear and adjust policy so that the speculators walk away with billions in profits irrespective of the policy impacts on the people of Japan.

He is continually wrong about everything – including the power of the financial markets.

There is now widespread financial market speculation aiming to profit from a change in the Bank’s policy, which the ‘clever’ financial markets think is inevitable because, after all, mainstream economics says that when inflation is rising interest rates have to rise.

Fools’ logic.

So there is a proliferation of short-selling in the hope that Japanese government bond yields will rise as the Bank of Japan abandons its very successful yield curve control policy (which uses the currency-issuing capacity to buy as many bonds as is required to thwart attempts by speculators to push up 10-year JGB yields).

The bullies think this will allow them to close their short contracts upon maturity by buying the bonds at a cheaper price than they were promised in their short forward contracts and hence walk away with profit.

Whenever you hear or read some investment banker claiming interest rates have to rise to deal with inflation you can conclude that the financial institutions they work for have speculative trades that will benefit from rising interest rates.

So the strategy is to get on the TV or in the press and feign concern for accelerating inflation and urge responsible monetary policy adjustments when the only motivation is to profit.

But, the bullies in the financial markets haven’t seemed to cotton on to the fact that, in fact, they are supplicants. They are not in charge.

They can only gain from short selling strategies which attempt to undermine local financial stability if the central bank allows them to.

The financial media was incredulous though when the Bank of Japan held its previous course.

I read statements such as:

1. “Despite an encyclopaedia full of speculation to the contrary, the BoJ defied intense market pressure and maintained their existing measurers on yield curve control (YCC) during their latest policy meeting overnight”.

2. “The news sent the recently airborne yen diving”.

3. “Looking ahead, markets could well test the BoJ’s resolve even more aggressively, as they attempt to force the BoJ to ditch YCC”.

This morning (January 26, 2023), the Bank of Japan published a – Summary of Opinions at the Monetary Policy Meeting on January 17 and 18, 2023.

It is clear they have a superior understanding about the current situation to that expressed by central bank boards around the world.

The Bank notes that:

The year-on-year rate of increase in the consumer price index (CPI) is likely to be relatively high in the short run due to the effects of a pass-through to consumer prices of cost increases led by a rise in import prices. The rate of increase is then expected to decelerate toward the middle of fiscal 2023 due to a waning of these effects, as well as to the effects of pushing down energy prices from the government’s economic measures …

The year-on-year rate of increase in the import price index has decelerated clearly, and upward pressure of costs, which has driven price rises, has started to wane …

Progress in the pass-through of cost increases has led to improvement in corporate profits and to active wage hikes and investment. In this situation, a virtuous cycle has started to operate somewhat, in which such developments bring about further improvement in profits and additional wage hikes through higher employee engagement and through creating innovation.


1. The current inflation is transitory and does not warrant interest rate rises.

2. Fiscal policy can deal with the rising imported energy prices – including subsidies to households to cushion the cost-of-living pressure.

3. The peak in price pressures is passing.

4. It is ‘virtuous’ that profits AND nominal wages are rising. You won’t find that sentiment expressed elsewhere where policy makers have been demanding workers accept real wage cuts.

On monetary policy, the Bank noted:

Considering the outlook for prices, at present, it is important for the Bank to continue with monetary easing and thereby firmly support the economy and realize a favorable environment for firms to raise wages …

In order to encourage firms’ efforts with regard to business transformation until sustained wage increases can be expected, the Bank needs to curb interest rate rises across the entire yield curve while paying attention to the functioning of bond markets.


1. The objective is to create a higher wage, higher productivity economy – the opposite ambition to other nations at present.

2. The Bank must do everything to maintain stimulus to allow activity to increase to support wage increases.

And further on monetary policy – and a subtle warning to financial markets:

It may take some time for the market to calm down and for market functioning to recover. The Bank should carefully explain that it needs to continue with monetary easing, that its accommodative policy stance has not been changed, and that it will take time to achieve the price stability target of 2 percent in a sustainable and stable manner because wage increases have not yet become full-fledged …

There has been upward pressure on long-term interest rates, and the distortions on the yield curve have not dissipated. Given this, the Bank should curb interest rate rises across the entire yield curve through measures such as increasing the amount of Japanese government bond (JGB) purchases and enhancing the Funds-Supplying Operations against Pooled Collateral.


1. It would better for the speculators to stop their futile attempts to profit from pressuring the Bank to raise rates and end its bond-buying program.

2. The Bank will not cede to this pressure, nor does it have to and will actually extend its interest rate control and bond-buying.

3. Eat your heart out!

Later in the document you can read input from the Ministry of Finance and the Cabinet Office which essentially say that the government is going to introduce new fiscal expansionary measures to “address the downside risks to Japan’s economy and put it on a sustainable growth path led by private demand.”

No fiscal surplus obsession there!

COVID studies – Nature

This week, I read a recently released review of the now extensive scientific literature studying the longer term impacts of Covid.

The review – Long COVID: major findings, mechanisms and recommendations – was published in Nature on January 13, 2023, and provides a state-of-art update on the vast array of credible research into the topic.

While the Great Barrington mob are on Twitter and elsewhere publishing stories about conspiracies by governments to impose autocratic rule on societies and/or big pharma strategies to ensure they make big profits by forcing us to believe Covid is dangerous, when, according to these geniuses it is less a problem than seasonal flu, the real science is building up an impressive case history that is anything but soothing.

I urge people to read the article.

The body of evidence is converging on the view that long Covid is a “debilitating illness” and occurs more often that we might imagine.

Some 65 million people are now estimated to suffer this illness including many children, who will face disability for the rest of their lives because their parents didn’t protect them from initial infection.

The evidence is that:

The incidence is estimated at 10-30% of non-hospitalized cases, 50-70% of hospitalized cases2,3 and 10-12% of vaccinated cases … Long COVID is associated with all ages and acute phase disease severities, with the highest percentage of diagnoses between the ages of 36 and 50 years, and most long COVID cases are in non-hospitalized patients with a mild acute illness

Overall, we need more research to further our knowledge, better testing regimes, and more public safety measures (mandatory mask wearing, better ventilation in buildings and schools) and more.

There is still a massive amount we still don’t know about the virus.

But what we now know tells me that if you can avoid getting infected in the first place you will be much better off than not.

So when governments, who have buckled to the pressures imposed by capital to ‘open up’ tell us that we are in a post-Covid era and learning to ‘live with Covid’, I remind myself of the still massive death incidence arising from the illness and the chronic disability that societies will have to deal with including reduced life expectancy, labour market disruptions and more.

We have certainly not entered a post-Covid era in substance.

Helsinki Public Lecture – The global challenges in the face of an on-going pandemic, climate change and rising inflation – January 25, 2023

Last night (January 26, 2023), I will presented my annual public lecture at the University of Helsinki.

The topic this year is – The global challenges in the face of an on-going pandemic, climate change and rising inflation – and I analysed the changes that have occurred around the globe over the last 12 months.

It was streamed on YouTube and there must have been network congestion because there was a delay in the broadcast and the saved recorded doesn’t match the audio with the pictures.

After initially trying to deal with the delay I just went with it and avoided looking at the screen because it was about 20 seconds behind where I was.

So I just talked into the ‘wind’ looking into the camera.

The quality of audio is okay despite the technical hiccups.

MMTed and edX MOOC – Modern Monetary Theory: Economics for the 21st Century – enrolments now open

MMTed invites you to enrol for the edX MOOC – Modern Monetary Theory: Economics for the 21st Century – is now open for enrolments.

It’s a free 4-week course and the course starts on February 15, 2023.

You will be able to learn about MMT properly with lots of videos, discussion, and more. Various MMT academics make appearances.

For those who have already completed the course when it was previously offered, there will be some new material available this time.

New video and text materials will be presented to discuss the current inflationary episode from an MMT perspective.

There will also be a few live interactive events where students can discuss the material and ask questions with me.

Further Details:

Music – Suzuki Tsunekichi

This is what I have been listening to while working this morning.

This song is from Japanese singer/guitarist – Suzuki Tsunekichi – who died in 2019 from cancer but left a magnificent body of work for us to continue enjoying.

This song – Omoide – is the theme song for the manga-inspired series – Midnight Diner (Tokyo Stories) – which is one of those brilliant Japanese cinematic experiences.

The song is from his 2006 first solo album – Zeigo (released by Off-Note label).

The song rehearses a classic Japanese narrative in music and fiction – that of the ephemeral nature of things and our memories of past events long gone.

It sets the scene for the series.

You can see the original manga that inspired the series – Shinya Shokudo – at the Internet Archive.

The stories in the TV series and the manga and the characters developed are really interesting and entertaining.

And the music is beautiful to say the least – creating a sense of calm.

That is enough for today!

(c) Copyright 2023 William Mitchell. All Rights Reserved.

This Post Has 17 Comments

  1. Whoa Professor! At 58:35 you talk of decoupling energy use from economic activity. All of my engineering/scientific knowledge tells me that the laws of thermodynamics do not support that proposition.

    As the only reason that economic activity occurs is via an input of energy to achieve a useful work output which is determined to be of economic value, perhaps you meant to talk about decoupling of carbon based energy inputs from economic activity (shut down the carbon polluters) to be substituted by non-carbon polluting energy from such as renewables. The artificial academic silos need to fall and maybe we could have a School of Engonomics (a combination of energy, engineering and economics) that represents the way things actually function in the real world within which we all exist. When it is appreciated that advances in understanding and application of science/engineering have come about by observing nature or postulating a theory of reality and then testing it empirically, it’s long overdue to bring economics in from the cold. Why is it that orthodox economics, as it is currently taught, is patently self-delusional bullshit? No need to answer that!

    While I essentially agree with the views of William E Rees (see for his thesis) which can be summed up in his words relative to humanity acting on what’s needed to be done if we are to survive on our planet – “We can, but we won’t”, I am not prepared to give up the fight for change. What I’m doing may be futile but that will be the assured outcome if we say and do nothing.

    Reminds me of the joke where the political adviser says to the Minister: “But Minister that is contrary to the laws of thermodynamics.”. And the Minister replies: “Well, in that case, we’ll just have to change the laws.” Economists probably don’t get the joke.

  2. There has never been a better time in my lifetime for the left to split away and form a new political movement. At this point in the democratic process and what it has become, I simply can’t see any reason why it shouldn’t happen.

    An anti – War, IMF, world bank, WEF, EU, neoliberal, globalist, NATO, FIRE sector party. That refuses American money and money from businesses. That stands up against American interests and which is a bottom up grass roots movement. That promises to smash the monopoly power over every aspect of our lives to smithereens, and leaves the insane identity politics to the green brigade will attract many in the political environment we all live in.

    But it will never happen as it is weighed down by internationalism. The belief and priority it can change other countries from within. When they haven’t even started to believe or created policies that can change the country they live in.

    Compare that with the break away right who plan to change the country using American money into the American far right. Who are at least 10 years ahead with their thinking and ready to implement their plan.

  3. Central bankers are not worried about inflation (with the exception of Japan’s right now, but with half of the world screaming for them to join the club).
    In the west, nobody in the upper-classes is worried about inflation.
    Inflation is good for asset value.
    If you own real estate and, in a year, the value of that wealth doubles, that’s good for you.
    That’s also REAL inflation.
    And central bankers will do anything to make that happen.
    “Fighting” Inflation is an excuse to hike interest rates.
    Who suffers? The lower classes.
    So you have to tell them bed time stories to keep them calm.
    “Keep Calm”, says the T-Shirt. “Obey” says the cap.
    Central bankers don’t care if we live or die.
    We’re all expendable.
    Who is gouging with interest rate hikes?
    The FIRE sector.
    Commercial banks are beeing paid by central banks for the reserves they keep there.
    The bigger the interest rate, the more they earn.
    They don’t have to do anything to earn millions.
    Just sit down and collect.

  4. Mr. Mitchell,
    You are perhaps focusing on the wrong thing.
    Japan’s ability to keep interest rates down is exclusively a function of their lack of foreign debt, but this is not to say that the BOJ policies do not have negative effects.
    In particular, the multi-decade low yen exchange rate vs. the dollar coupled with rising energy/commodity/food prices (pretty much all imported) has caused Japan to have trade deficits for 17 months in a row and counting.
    Japan does have enormous overseas holdings of assets, but this ongoing trade deficit run is not sustainable. The entire point of Japan’s multi-generational policy of trade surpluses is to ensure that its ability to afford imports will not be jeapordized.
    And while I share your disdain for “bond vigilantes” or “the market” or other forms of neoliberal nonsense, this does not mean that I share your faith that MMT policies can address structural issues with energy/commodity/food prices due to a supply constrained environment.
    Japan is in a terrible position: keeping the yen structurally weak vs. the dollar (a major underpinning over BOJ low interest rates) has resulted in the aforementioned trade deficits, but strengthening the yen won’t obviously reverse the currency deficit situation as it equally hurts Japanese exporters’ competitiveness particularly vs. China and South Korea.
    Sadly, it seems Japan is betting that they can regain Western import market share by being on the West’s side in its confrontation with China.

  5. “Whenever you hear or read some investment banker claiming interest rates have to rise to deal with inflation you can conclude that the financial institutions they work for have speculative trades that will benefit from rising interest rates.”

    I have a tendency of not agreeing with this claim.

    I have sufficient evidence in the years of my professional life (that unfortunately I cannot share here in a blog’s comments page) that mainstream economists, bankers and the likes legitimately believe in their flawed mainstream models. They truly believe in that nonsense, it’s not just about conflict of interest or dishonesty.

    I’m not claiming they aren’t greedy or anything, but I believe that there is enough evidence to support the claim that ignorance is what prevails in those cases.

  6. Fred, when you say ” At 58:35 you talk of decoupling energy use from economic activity.” I didn’t hear it as such – I heard it as decoupling from the measurement of GDP. Or am I wrong.

  7. Patricia, listening again, I hear Bill say “We should be achieving policy design that decouples energy use from economic activity”. What I’m saying is that such is not possible in a world which functions in accordance with the laws of thermodynamics.

    Rather than have me going into a detailed explanation in this post of those laws and how they apply to the entire ecological system within which we live, economics or no economics, I recommend that you investigate an excellent YouTube series on Ecological Economics by Dr Dan O’Neill of Leeds University. Economists require to become systems thinkers. At least the heterodox school of macroeconomics has an understanding of systems.

    Also, in any case, the monetary measure of production that is GDP that economists use is a coarse and dirty equivalent measure of the amount of energy consumed in achieving that production.

    Ecological Economics finally brings into play the whole ecological system within which we live to the study of economics. Under our prevailing neoclassical orthodox economics matters vital to our survival are thrown into the bin of externalities, under the absurd belief that the economy doesn’t have to be concerned about such “irrelevancies”.

    While I’m here I’ll correct my above quote from William Rees which should read “We could, but we won’t”.

  8. Dear Fred Schilling (at 2023/01/28 at 7:00 am)

    Thanks for your input.

    I am fully aware of the laws of thermodynamics.

    My comment was in the context of changing the composition of GDP away from carbon energy use not energy use per se. There are two ways of achieving a decoupling of measured GDP from carbon use:

    (a) shift output to activities that use less carbon. So shifting farming towards permaculture practices or employing more people to play music and write poetry rather that work in heavy smelters.

    (b) redesign existing activities that use carbon intensively to use renewables. So replacing coal-fire power generation with wind and solar.

    The whole point of that segment of my talk was to separate measurement of GDP from use of carbon – that is what we mean by decoupling.

    best wishes

  9. Bill, please keep us all updated on this conflict between the BOJ and the speculators. This seems like a key test of MMT. If MMT is correct then the BOJ can win this fight. However, it is possible that the BOJ will cave in to the speculators demands even though MMT is correct. OTOH, if MMT is wrong then the BOJ will be forced to raise interest rates. I wonder how how someone like me could tell the difference.
    So, I hope for the sake of MMT being proven ‘true’ that the BOJ does win this fight.

  10. @Steve_American I don’t think you have quite grasped MMT based on the BOJ v speculators contest as presented by you. In the simplest of terms, the BOJ could choose to raise its long bond ceiling (and policy rate) if it felt the damage to the exchange rate (and its impacts) would be too great. That in no way violates anything in MMT that I have seen in this blog and in the literature I have perused.

  11. Esp, you could be right.
    However, if you are right then it seems to me that the speculators do have more power than Bill seems the think that they have.
    A falling yen makes its exports cheaper, and makes its imports more expensive.
    However, as Bill said Japan can use its fiscal power to help households pay for the imports that they need. Like energy.
    This is part of the power that MMT gives to the Japanese Gov.

  12. Central bank sovereignty, in Japan as elsewhere, is constrained by the “impossible trinity.” (MMT accepts the constraints proposed by the impossible trinity, no?)

    The BOJ has chosen, from the trinity, sovereignty and free capital flows. Speculators think that the BOJ will be forced by yen depreciation to give up (some) sovereignty in exchange for (loosely) fixing the exchange rate.

  13. It must be nice to be an MMTer in Japan, as opposed to being one in the US and having to read infuriatingly stupid economic commentary in the newspaper every day.

    I had hopes for Chairman Powell for a while but then he caved in to the Larry Sommerses and Wall Street…

  14. So the ‘widow-maker’ trade from the 80’s/90’s
    Is still going on ?
    Who bets against a Central Bank on assets denominated in the Currency the Central Bank can digitally type into existence??

  15. In the BOJ statement, its not clear whether the wages hikes in question are in real or nominal terms. It needs to be in real terms otherwise the government is doing a disservice to its citizens.

  16. I saw an argument that japan didn’t increase their tax because it was suffering for a long time with deflation and that the inflation in pandemics was actually a good thing. What to say about that?

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