Japan’s deflation has persisted even in the face of massive BOJ efforts that, according to conventional economics, should have restored normal levels of inflation.
Pointer from Mark Thoma. BOJ = Bank of Japan, their central bank.
We have all been taught that money and inflation are tightly linked. Those of you have read Specialization and Trade know that one of my heresies is to deny that this is true under normal circumstances (large government deficits that can only be financed by printing money are the exception; to get hyperinflation, you need the fiscal driver of money creation). I say that money and “the overall price level” are a consensual hallucination. They are embedded in cultural norms and expectations.
The consensual hallucination hypothesis (which was held by the late Fischer Black) is consistent with the Japanese experience.
What in theory would happen if the BOJ committed to by financial assets until inflation was ~4%? Could they own the entire world?
The BoJ should reduce their borrowing, and increase Yen printing, by some 5%, each quarter, until there is positive inflation. The “massive efforts” has NOT included printing thousands of yen notes and distributing them to successful married couples having children, nor to new business owners who have successful new businesses.
They should do so with “social prizes” and tax credits so that normal folk have more cash to spend — and less need or desire to borrow.
I say that money and “the overall price level” are a consensual hallucination. They are embedded in cultural norms and expectations.
What if it is something different? The Japanese market has been under consensual hallucination for 25 years (or 18 years from the Asian flu) so it has become long term reality.
I still Japan is the canary in the coalmine of where all developed and developing nations end up following. (China especially!)
I can already hear the Scott Sumner version of the Intellectual Turing Test in my ears, “They aren’t really trying because they have plenty of ammunition left, but they’re not using it, and every time they get close to the purported goal, they pull back.”
SS’s theory of monetary policy is a joke. It’s based on Milton Friedman’s approach to nominal income but Milton was useless because he didn’t define money. You can write the identities M = kY = k(Py) and they will be true for any definition of money (from M0 to M1,000,0000). Milton argued that it was possible to find a stable demand for M (as if there were only one M for which that would be true), so he assumed that k would a stable parameter. He acknowledged that that M could be different across time and space, but more important that the same M could be controlled by the monetary authority. So Milton’s approach was useless.
Scott likes to say “never reason from a price change”. I like to say “never reason from an identity”, or as Arnold would say “forget about a macro theory based on accounting identities”.
A related but different conjecture.
Some things societies do depend on people having naive or false beliefs. And so for example once everybody really knows that going to war mostly means they get killed with not apparent useful effect, major wars become harder to start (but not impossible.)
Suppose what has really happened in Japan is something like this:
A. People have come to view child rearing as far too difficult and unrewarding, and so the birth rate is very low.
B. People view the odds that their material life will somehow be much better as nil – because material quality of life in Japan is already very high, and because of the effects of A.
If that “locks in” (as it may have in Japan) then one might conjecture the following things:
1. It is not possible to create controlled inflation – the only choices or deflation or hyperinflation – there is no in between. (This may be true of the US as well, we’ll likely find out over the next 20 years.)
2. Regardless of the accounting of price level, the actual output of well being of the economy may be near its maximum possible, and no government behavoir will actually change it very much.
If central banks could control inflation, they could manage the economy, and it is axiomatic that banks can’t control the economy, therefore they can’t control inflation.
QED