Philip Pilkington: Inflation-Targeting Experiment May Start in Japan… But at What Cost?

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Yves here. Having worked in Japan, it is routine for the Western media to be out of the loop. So it is entirely plausible that there would be major policy moves under way in the island nation that had not been picked up by the press here.

By Philip Pilkington, a writer and journalist based in Dublin, Ireland. You can follow him on Twitter at @pilkingtonphil

Rumors abound that a deal is fomenting in Japan that might lead to the inflation targeting proposal that so many progressives champion on their blogs being put in place (clarification: even though inflation targeting was announced in February, there are doubts in Japan as to its seriousness. Japan is famous for “administrative guidance” in lieu of action).

About two weeks ago the Japanese denied the rumors, but they’re still cropping up among investors. I’ve heard similar accounts through my channels. The latest account is of a deal between Prime Minister Noda and the LDP (the main opposition party) to amend the Bank of Japan law in return for tax increases. The LPD has already drafted a law imposing inflation targeting on the BoJ in order to bring down the stratospheric yen. The LPD bill is said to be similar to a 2010 proposal by Your Party to establish an inflation goal and make the tenure of BoJ leadership dependent on sticking reasonably close to the target.

So, should the neoclassical-Keynesian/neo-monetarist commentariat be pleased? The tradeoff looks ugly. If the rumors prove to be true, the Japanese government is going to engage in fiscal austerity by raising taxes so that they may pass a law that states that any central banker who fails to achieve specific price-rises will lose his or her job. But reducing fiscal deficits in a weak and already deflation prone economy is even more deflationary; it’s hard to see how the BoJ can hit the target in the face of this headwind.

In truth, we have no idea if this policy is going to be effective in any way. And if it is effective we have no idea what sort of impact its going to have. I argued the other day that inflation targeting done in isolation may well lead to investors simply pouring into various so-called inflation hedges (gold, silver and other commodities) which, in an extreme case, may lead them to pull funds out of the government bond markets, drive up yields and thus lead to more excuses for the government to engage in austerity.

I don’t know if that will happen; it is merely one of many possibilities. But nor do the champions of inflation targeting like Paul Krugman and Matt Yglesias know what will happen if the policy is implemented — although they are confident because their ISLM model tells them that, theoretically, investment should rise together with a rise in inflation.

Well, we’ll see. After all, these are only rumors for now. Personally, I hope they’re not true. But if they are and the inflation-target skeptics are proved right, the champions might learn at least one lesson: throw a group of politicians what seems to be a simple and neat solution and they will pursue it with gusto — even at the expense of tried and tested, bread and butter policies that we know work.

So, to the neoclassical-Keynesian/neo-monetarist nexus: if you do throw around these sorts of ideas you’d better be certain that they will work. Because if you know anything about politics, you’d better realise what pushing them might lead to.

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  1. YY

    I was under the impression that BOJ has currently a 1% inflation target, and that this is not news. Am I missing something or is this about something else all together?

    1. Literary Critic

      They mean target high inflation. ie print boatloads of money until inflation just happens. We have to stay tuned to see what the the distribution channel is gonna be????

      maybe they have been talking to F. Beard?

    2. Yves Smith Post author

      The idea is to hold the BoJ’s feet to the fire. The tone of the rumor was also that the target might be increased down the road (Japanese are famous for vague insinuation, Japanese is an amazingly vague language).

  2. MyLessThanPrimeBeef

    So, to the neoclassical-Keynesian/neo-monetarist nexus: if you do throw around these sorts of ideas you’d better be certain that they will work.


    That should go for all economic ideas.

    Humans, and guinea pigs, are not guinea pigs (not to be used as guinea pigs, to be precise). That’s to say we have to ask people for permissions before conducting experiments like MMT on them.

  3. Hugh

    I don’t know what assets the BOJ could buy that would spark inflation. It could print the money but, as Literary Critic asks, what would be the distribution channel? It could raise its rates to banks or increase their reserve requirements, but these would both be credit tightening moves and I don’t see how either would encourage investment.

    It seems kind of pointless to have an inflation targeting policy if you don’t have any mechanism to induce inflation.

    Oh, and can we get our terminology right? Krugman is an Establishment liberal. I suppose you could call him a faux progressive. But progressive? Not in a million years.

    1. Fiver

      Curious what you believe is the difference between a vintage Democratic Party “liberal” and a “progressive”.

      I ask in the context of, for example, HuffPost’s claim to the brand “progressive” where, it’s clear, “progressive” embraces all manner of abuse of Executive powers, among other things (several days of “Hail Obama, Slayer of bin Laden” for instance).

  4. shane536

    Why not pensions as a channel? they have the oldest population the world and a demograhpic that means it’s getting worse. They also have no way of paying for them.

    Why not print the cash and give it directly to the oldies? I live here and I BET that’s what they are going to do. I’m not sure they have any other option. Expect them to start as soon as they have used the high yen to buy up a bunch of emerging nation infrastructure. Once the yen collapses (which it will once people see what they are up to) their export industry will take off.

    1. Jim Haygood

      Speaking of ‘oldies,’ PhilPil’s casual aside about ‘the inflation targeting proposal that so many progressives champion on their blogs’ gives me an ‘1896 deja vu’ feeling.

      Evidently, progressives are backing the easy-money platform of William Jennings Obama, while the hard-money, sanctity-of-contract cohort sticks with Mitt McKinley.

      Since the average self-designated progressive is probably, like, 60 years old, I doubt they’re gonna be able to party too hearty when deliberate inflationism turns the world’s post-industrial, formerly-wealthy countries into lurid, Weimar-style cabarets.

      When it comes to Japan, note the caveat ‘in return for tax increases.’ Japan already tried increasing its consumption tax from 3% to 5% in the late 1990s, and it produced an immediate recession. But when dug into a hole with a failing policy, the Japanese Way is to suck in your breath, put on your stone face and dig even faster.


    2. F. Beard

      The Yen need not collapse if the money giveaway is combined with leverage restrictions on the banks to keep them from blowing another bubble.

  5. Travis

    Psss. In Japan it is GDP per capita that counts. Throw in pop decline and everything you think you know about Japan gets stood on its head.

  6. Otay

    So in applying theory to form an investment thesis:

    If I prescribe to Austrian economics I buy gold. If I’m a proponent fo MMT I buy gold. If I’m a neoclassical-Keynesian I buy gold. If I’m a n gold neo-monetarist I buy gold and if I’m just tired of all the kleptocracy BS and want to go about my job as an engineer I buy gold. Seems the bankers are making it easy for me no?

    1. Literary Critic

      Unless central banks just print up money and they buy gold.

      Better work faster in that case.

      1. Susan the other

        Isn’t this what China is doing? And Japan is focused on trade with China so Japan is trying to achieve a better position. Japan is so small it can never absorb the abuse, aka trade deficits, that we have with China.

        1. Literary Critic

          The CBs of China, India and Russia all have been buying gold lately, but they are selling US treasury bonds to raise cash to buy gold – not just printing their own currency to buy gold.

          I really don’t know what’s up with this latest BOJ rumor. Sounds suspicious, mainly because it sound so dumb on so many levels. I prefer to think the Japs have some sort of sneaky 3 card Monte game on if there is any meat to this rumor. We’ll have to wait for the details to figure it out – if we ever get details, that is.

          BTW: Japan started moving manufacturing to China in the 60s – they were the first of any of the multi-nationals. But they don’t have problems with imports because they have had high tariffs and other protections for their domestic market. That’s were they make the big bucks, then “dump” when they want to enter foreign markets. Or at least that was the way they played the game back in the good old days of “The Japanese Miracle”.

          1. Fiver

            Curious as to how Mao went about bringing the hated Japanese to China to set up manufacturing. Can you point me to some background sources?

    2. F. Beard

      Substitute “Cabbage Patch Doll” for gold in your comment to see how insane it is.

      Sure, people made money off “investing” in “Cabbage Patch Dolls” but it would have been an economic disaster if very many people had done so.

  7. steve from virginia

    Inflation-smation: they need to fix those f**king reactors. They need to do it fast and they need to do it now. Regardless of the cost.

    If they dawdle and one-or more of a long list of ‘unpleasant’ outcomes occur, Japan will have more on its plate than deflation … such as where to put 100 million Japanese exiles.

    1. mk

      Prof. Takeda Kunihiko from Chubu university roughly estimated anyone can no longer live in Japan after 3/31/2015.

      According to his explanation, the yearly dose will reach 5mSv/y (External dose and the slight internal dose) in 3 years and 4 months from January of 2012.

      He states, he receives radiation data from one of his readers. The person measures radiation three times a day, at work, doorway of house, and the living room in Mie prefecture (500km from Fukushima). Prof. Takeda admits the data is scientific enough.

      From the radiation level has been in the increasing trend since last September. In linear equations (y=ax+b), the average from January to March (=b) is 0.10 μSv/h, a is +0.004 μSv/h. y reaches 5mSv/y in 3 years and 3 months, so yearly dose will be over 5mSv/y in 3 years and 4 months from January of 2012, when is 3/31/2015.

      Prof. Takeda admits the data was collected by an individual and a and b are calculated by least squares but it’s rational enough.

      The reason why radiation level is increasing is not explained.

      Iori Mochizuki

      1. Susan the other

        This is incomprehensible. What are they waiting for? Hope they are printing up Yen to pay for the cement to bury Fukushima. Then nobody can accuse them of currency warfare. But even so, they might have to pack up and move to China.

      2. Victor

        Totally off-topic but radiation levels at 5mSv/y really isn’t all that high. Nuclear energy workers receive similar doses on a continuous bases with very little or no adverse effects. Annual limits in my profession is 20mSv a year or 50mSv over 3 years.

  8. F. Beard

    If the purpose of the inflation is to enable the Japanese to more easily pay their private debt then just give the general population money.

  9. Woj

    My hunch is that asset purchases by the Bank of Japan (BOJ) will have to be significantly greater than any reduction in government deficits in order to achieve the stated price target (if only for a short time). I think Pilkington is on the right track with regards to the type of assets that will see price inflation. As an inflation-targeting skeptic, I’m very thankful that if some politicians are going to experiment with these policies, it won’t be the US that has to bear the significant risks.

  10. Fiver

    Japan is in a very, very serious jam. If China and/or the US/Europe slow to any real degree for any length of time, Japan’s surplus days are over, without which its Yen will implode. It seems paradoxical, but only by continually devaluing can Japan hope to keep its Yen strong enough in THIS global configuration to avert a pasting.

    I’ll post again this piece from a speculator whose politics, ideology and financial “advice” I have no interest in whatever. I do, though, think this piece contains some very valuable insight into what’s happening with Japan (and China):

    and this piece from Andie Xie:

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