Mikio Kumada tells the right story about the Japanese GDP numbers

Earlier today we got numbers for Japanese GDP numbers for Q4 2014. Watch my friend Mikio Kumada comment on the numbers here.

I fully share Mikio’s optimistic reading of the numbers. Bank of Japan’s quantitative easing is working and is lifting nominal spending growth.

Does that solve all Japan’s problems? No certainly not. It cannot do anything about Japan’s structural problems – particularly the negative demographics – but it is pulling Japan out of the deflationary-trap. And that is exactly what BoJ governor Kuroda set out to do. Now Prime Minister Abe has to deliver on structural reform, but that can be said about every industrialized country in the world.

PS Yes, I am positive about the Bank of Japan’s policy actions, but I still think it would have been much better with a NGDP level target for Japan rather than a 2% inflation target.

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3 Comments

  1. Sorry, I can not stop laughing about this blog and your strange concept of NGDP targeting.
    The first big laughter was you suggested that the SNB should have moved the cap to 1.30 earlier and that you could not explain why the Swiss trade regularly increased despite a stronger currency.
    https://marketmonetarist.com/2015/01/20/what-the-snb-should-have-done/

    The second one was when I debunked parts of Scott Sumners analysis on Seeking Alpha (see comments).
    http://seekingalpha.com/article/2872256-the-issue-snb-defenders-dont-address?page=2

    The third big laughter was just these days when Germany had strong growth in particular thanks to the “real component of growth”, namely deflation.

    I would be happy if you read just the first 2 chapters of Michael Pettis Great Rebalancing. And if you claim to have done it already, then please read it again!
    I admit I have just read Michael in more detail just now.
    It perfectly fits my economic analysis of balance of payments and central bank balance sheets and the effects on savings rate and investment rates. You might be aware that this analysis helped to forecast the end of the CHF cap (CFA Society in September 2014)
    http://www.cfasociety.org/switzerland/Lists/Events%20Calendar/Attachments/521/George%20Dorgan%20at%20CFA%20Society.pdf
    Michael’s and my analysis are nothing new, just logical analysis of balance sheet entries.

    So what happened in Japan? The BoJ successfully managed to devalue the currency, so-called “competitive devaluation”.
    As Michael Pettis clearly explains, inflation forced up the savings rate.
    http://snbchf.com/sector-balance/abenomics-savings/

    Given that the Jap. savings rate was nearly negative, it was a late but important measure. Obviously lower consumption slowed Japanese GDP growth for a certain period.

    Compared to rising wages in the rest of Asia, in particular China and Korea, a cheap yen made Japanese labor relatively cheap. This finally translated in some investment-driven growth, visible e.g. in machine orders and some timidly higher wages. Offshoring has become too expensive

    Now you guys are proposing to increase (asset price) inflation – what you call NGDP targeting- and to devalue the currency in the Eurozone, in Japan and elsewhere. This certainly implies that you force up the savings rate, except in the 1:N country, the United States that you generously exempt. The Fragile Five and Russia anyway had to increase savings anyway because they overheated, the 5 had deeply negative current accounts.

    The wonderful result of god players (see Roland Baader) like Draghi, Kuroda, Scott and you was to force the whole world into a Great Depression style slowing.

    Thank you Lars!

    But Kuroda was the first to win the Great Depression-style devaluation game! My compliments Haruhiko, the structural Jap. problems deserve it!

    Reply
  2. Murad

     /  February 27, 2015

    Being one of the NDGP targeting supporters, I couldn’t help noticing some issues raised in this news and pointing to some mistakes (my personal view) of mr. Kumada. The 2% increase in real GDP they were talking on the news is just on a quarter-over-quarter basis, as for y/y basis the real Q4 2014 GDP growth is slightly below 0 (-0.5% according to the latest estimates). And the nominal Q4 2014 GDP growth (y/y) is about 2% which is solely due to the GDP deflator. And as the deflator just like the GDP itself is measured at market prices (I think it is), then it includes the April 2014 Sales tax rise from 5 to 8%, which will lose effect starting from Q2 2015. So excluding this event, we basically have both the GDP deflator growth (which has never reached some targeted 2% during the whole Abe-Kuroda QE, excluding tax hike) and the NGDP growth of 0% (at best) for the Q4 2014 (y/y). So, neither the theoretically targeted gdp defl. growth of 2% or NGDP growth at 4-5% is achieved (at least so far), which unfortunately leads me to see the latest numbers not so optimistic.

    Reply
  3. The Joker

     /  March 12, 2015

    Japan did pretty well in deflation http://www.shadowfed.org/wp-content/uploads/2010/03/plosser_1103_a.pdf
    Much better than Italy for instance that did never experienced falling prices. Deflation troubles are quite overated but the article is puzzling: it seems to say that printing works however if it does not work is because of someone else fault (Abe’s missing reforms)

    Reply

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