Monetary policy works just fine – Exhibit 14743: The case of Japanese earnings

The graph below shows the ratio of upward to downward revisions of equity analysts’ earnings forecasts in different countries. I stole the graph from Walter Kurtz at Sober Look. Walter himself got the data from Merrill Lynch.

Just take a look in the spike in upward earnings revisions (relative to downward revision) for Japanese companies after Haruhiko Kuroda was nominated for new Bank of Japan governor back in February and he later announced his aggressive plan for hitting the newly introduced 2% inflation target.

This is yet another very strong prove that monetary policy can be extremely powerful. The graph also shows the importance of the Chuck Norris effect – monetary policy is to a large extent about expectations or as Scott Sumner would say: Monetary Policy works with long and variable leads – or rather I believe that the leads are not very long and not very variable if the central bank gets the communication right and I believe that the BoJ is getting the communication just right so you are seeing a fairly strong and nearly imitate impact of the announced monetary easing.

PS As there tend to be a quite strong positive correlation between earning growth and nominal GDP growth I think we can safely say that the sharp increase in earnings expectations in Japan to a large extent reflects a marked upward shift in NGDP growth expectations.

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8 Comments

  1. Lio

     /  May 10, 2013

    Does this mean that the next time I want to know where the economy is going, I should blindly trust equity analysts’ forecasts rather than listening to serious economists? Is there anyone anywhere to seriously believe in this kind of argument?

    Reply
    • Lio,

      I personally don’t think that equity analysts are generally better or worse at forecasting the future than “serious analysts”, but I generally trust the market more than both equity analysts and economists. I know of nobody who has consistently been able to beat the market.

      My point in the post is not about the ability of equity analysts to forecast, but rather to show that monetary policy can have a distinct impact on the economy. This is just one of many signs that that is the case. Looking at macroeconomic data for Japan general show the same picture.

      Reply
      • lio67

         /  May 11, 2013

        1/ “I generally trust the market more than both equity analysts and economists.”
        Personally, I do not just blindly follow what others are doing. I’m sure you do the same. What would have you said if equity analysts’ forecasts had been different? Would they have been right too?

        What is the use of such a blog if we just need to look at the market to know all the economic truth, past, present and future?

        2/ “I know of nobody who has consistently been able to beat the market.”
        This does not prove that nobody tries to or is able to beat the market. What is that supposed to prove, exactly?

        3/ “My point in the post is not about the ability of equity analysts to forecast, but rather to show that monetary policy can have a distinct impact on the economy.”

        In this case, It does not prove that monetary policy can have a distinct impact on the economy but only on the expectations of some equity analysts. We will see in the future if they were right or not.

        4/ “This is just one of many signs that that is the case. Looking at macroeconomic data for Japan general show the same picture.”

        I would like to be as enthusiastic and optimistic as you about Japan. What are the signs you are talking about? Have you recently see a significant economic improvement in Japan? Due to monetary policy? Sustainable? For how long? Don’t jump the gun! It is many years since we expect a significant and lasting improvement in the Japanese economy. Nothing new. Monetary policy is just going to be more inflationary than before. And this is not good news for the long term.

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