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Home Publications Blogs Beat the Press NYT Seems Confused About the Purposes of Japan's Pro-Inflation Policy

NYT Seems Confused About the Purposes of Japan's Pro-Inflation Policy

Tuesday, 11 March 2014 05:32

The NYT ran a piece that implied that Japan's policy of deliberately trying to raise the rate of inflation is not working when in fact most of the evidence cited in the piece showed the opposite. For example, at one point it tells readers;

"Rather than start an economic revival, this “cost-push” inflation, as economists call it, could become a rising threat to Japanese stuck in a deflationary mind-set. Such people could see their hard-earned savings eroded by rising prices, warned Yukio Sakurai, a housing analyst based in Tokyo."

The point of the policy is to give businesses and individuals more incentive to spend now, since inflation will reduce the value of pools of idle savings. (The notion of "cost-push inflation" is ill-defined, since someone must be ending up with the money that represent higher costs.) Contrary to what is implied in the piece, the policy has led to a turnaround in prices, with core inflation at 0.7 percent over the last year according to the OECD. In prior years prices had been falling at roughly this pace.


Comments (17)Add Comment
written by LSTB, March 11, 2014 7:30
Funny, there was an article in Bloomberg last week about how small Japanese employers were starting to raise wages to fill positions.
written by dax, March 11, 2014 8:02
It's a particular Anglo-Saxon if not American mindset that, when savings are eroded, you're supposed to go out and spend your savings. I think most savers in the world would react by trying to save more, to make up for the erosion.
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The Cost-Push Inflation Ruse
written by Last Mover, March 11, 2014 8:55
The notion of "cost-push inflation" is ill-defined, since someone must be ending up with the money that represent higher costs.

That's because anti-Keynesians attribute cost-push "inflation" to true demand-pull inflation to imply the economy in question is already at "full employment".

In fact they actually support true cost-push "inflation" that brings gains to winners holding the assets in question in the form of relative price increases such as housing, stocks, oil, etc, whether in bubble form or driven by shortages and price spikes.

They oppose the demand-pull inflation necessary to achieve full employment because it forces some of the same winners, particularly the financial predators as lenders of debt for these assets, to face losses as the debt is paid back.

That's how anti-Keynesians game both sides of the macro equation. They support current asset gains driven by cost-push price increases to winners holding them, then oppose asset losses caused by demand-pull inflation, even those only necessary to attain full employment.
Inflation is still a mystery
written by Dave, March 11, 2014 9:32
The full dynamics of inflation are still a mystery. While I believe that rising prices, and an expectation of rising prices, gives incentives for business to buy durable goods, it is less clear how consumers react to the same prices. I don't know of many people who would spend more because of inflation. Consequently, the major medium to long term stimulus from inflation probably comes from consumer debt erosion, and that takes many years and a higher rate than .7.

I think this is a bit of a pipe dream. We'll see.
written by DJB, March 11, 2014 11:04
yes the people that have money just want it to be worth more and more

whereas the people who don't have any just want jobs

and this does require a redistribution of the money supply

which is what expansionary policy does in essence

written by DJB, March 11, 2014 11:10
of course you can't get away from that redistribution of the money supply issue

because that is what the rich want as well

and that is what austerity is about

redistribution of the money supply

to the rich

Skeptonomist has a point
written by A Populist, March 11, 2014 12:59
The idea that "price inflation is stimulative" is too simplistic.

I have to agree with Skeptonomist that price inflation in excess of wage inflation decreases real consumption.

Price inflation does reduce the "real" value of debt (as calculated by economists) - but debt needs to be paid off with wages, and if nominal wages aren't rising, then "real" debt (from the debtor's perspective) looms just as large. And for low wage earners, who are consuming all of their pay, having prices rise faster than wages, means either reduced consumption, or less cash left over to pay down debt.

And this idea of "pulling forward" consumption, is ill-advised. Better to establish a steady, sustainable increase in demand, by raising low end wages. If the goal is to stimulate short-term spending in the hope of making labor scarce enough to raise wages - that is an unstable way to run an economy. Especially when the ones you need to consume more, have low wages, and shouldn't be taking on debt. That spells bubble. Better to raise the minimum wage.

Dean's comment that *someone* must be getting the extra money from the inflated prices is correct. However, with wages stagnant, that *someone* is very likely to be a foreign supplier (due to falling Yen), or someone who is already a net creditor, and consuming all they wish to consume. The net effect, can very well be a net reduction in real domestic consumption - keeping the economy stagnant. And if Abe's idea is to export his way to full employment: Lack of demand is a net world-wide problem - as evidenced by the slowdown in Japanese exports.

When talking about increasing demand (and thus jobs), it is important to remember that distribution is *extremely* important - both in terms of maintaining consumption demand (increasing total hours worked) and allowing lower end workers to work fewer hours (providing jobs to the unemployed) - thus balancing the labor market.
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dean's (mostly) right
written by Squeezed Turnip, March 11, 2014 3:58
The point of the policy is to give businesses and individuals more incentive to spend now, since inflation will reduce the value of pools of idle savings.

That is certainly one of the points. And, skeptonomist and his supporters take note, 0.7% core inflation (1.6% CPI inflation) is hardly anywhere near what "runaway inflation" (2.5% seeming to be a favorite target of central bankers). Not only that, there are the preceding 14 years of deflation to account for, plus the current account deficits; no doubt it's a tricky spot that Japan fell into. But, now, also throw in the recent run on the "emerging markets" of late and Japan's looking very prettily positioned to compete in exports again. So is it partly sunny or partly cloudy?

In addition, to claim that the Fed (should it finally construct a consensus with the other main central banks that allows for a much-needed weaker dollar) would need to counter the fall of the yen, well that's just silly. China is by far the main concern for the US.
Forward guidance can't do what stimulus, full emp, labor polices, tax reform do.
written by jaaaaayceeeee, March 11, 2014 5:07

We know austerity, deflation and lowflation (which bond investors prefer to the stock market) increase debt burdens and hurt labor, here in the USA, in the Eurozone, and in Japan.

Skeptonomist, A Populist, and Pete are partially correct. If captured policy makers won't stimulate, legislate for full employment, support labor, stop socializing low pay (raise EITC instead of min wage) nor reform predatory tax incentives - then forward guidance from uncaptured central banks does little to counteract policy makers wasting lives.

But forward guidance is the only route our US central bank has taken to highlight these needed legislative reforms.

Asserting that getting the overvalued yen down, by itself causes stagflation and labor repression, however, sounds too much like another page from the rate hiker's guide to the galaxy, which last mover denounces.

Ever changing reasons to always raise rates require zombie, cockroach confidence fairies, debt hawksters, or bizzaro depictions of Dean Baker and Paul Krugman as anti-labor and anti-growth.

http://krugman.blogs.nytimes.com/2014/03/10/the-rate-hikers-guide-to-the-economy/?module=BlogPost-Title&version=Blog Main&contentCollection=Opinion&action=Click&pgtype=Blogs®ion=Body
This wasn't designed
written by Dave, March 11, 2014 6:47
I think people need to realize that this system wasn't designed to deal with a liquidity trap, so where we should go is speculation. It is like trying to fit a square peg in a round hole. If we get lucky, inflation might be inducible with extreme measures, but not by design.

I'd rather see top economists trying to devise a better system than placing all their hopes in an accidental success. The fed supposed to have the power to reduce unemployment, but the system is not currently designed for that. Why would it be? The fact is that it was designed by bankers for bankers. The employment mandate should be pursued, but it will require a more substantial overhaul of the system.
written by skeptonomist, March 11, 2014 6:53
Just to be clear, I think it could be disastrous if the Fed started raising interest rates significantly now. The reason that some people want to do this is that they think that the Fed could forestall inflation if it acted soon enough - that is before inflation even started to go up. This is another potentially harmful effect of believing too much in the powers of the Fed. Actually raising the inflation target would probably not be harmful, it just distracts from the things that really need to be done, especially reversing austerity.

The US got along pretty well in the era when the Fed kept a low profile and did not fool around much with interest rates, that is from the early 30's to roughly through the 50's. There were some inflation spikes, but they were not disastrous and subsided without high interest rates. There were no bond-market bubbles.
written by Squeezed Turnip, March 12, 2014 8:20
This is another potentially harmful effect of believing too much in the powers of the Fed.

Yes, let's leave that fantasy to the Pauls.

The effective fed funds rate is a powerful tool, and not the only one in their arsenal, as Dean suggests. I like Mehrling's observation (ala Traynor) that the Fed basically had to perform as dealer of last resort, not just lender of last resort. The 1950's didn't have to deal with market-based credit, but the current Fed does. How to do that well is being rebated.

And just to be clear, I value your opinions, skepto. I hope you don't take my critiques of thought as a critique of person.
Good Luck
written by A Populist, March 13, 2014 1:07
I don't see how this is going to work.

In normal times, a lower Yen should increase exports. But that is not happening. These are not normal times.

In normal times, one would expect price inflation to increase consumption spending.

But, who exactly is supposed to increase consumption in this scenario, thus increasing jobs? After decades of Japan trying different methods to stimulate the economy, and increase employment and wages - it is only logical for people to be skeptical that this time will work.

Decades of experience, are showing that those in power, are unwilling or unable to create economic security for the masses - indeed have made things ever less financially secure as time goes by. Increases in Investment spending are not needed - with excess capacity. That leaves government consumption, or private consumption. Who is going to consume more? The person with stagnant wages who is seeing price increases? The price increases are small (inflation still pretty low) so cash is still not that bad of a store of value. Goods which will increase employment (consumables) are not a good store of value.

I still say that price inflation by itself is not a good stimulus.

Not sure why my first post got so many "minuses"... Are you people against wage increases? I am not an inflation hawk - I am just saying that price inflation in excess of wage inflation is not a good thing. Do all of you think that it *is* a good thing?

My prediction is that Abenomics will fail. Not because of excessive inflation. On the contrary. Due to lack of demand, inflation will remain low, and wages will remain stagnant - unless there is an increase in government spending, a foreign "buyer of last resort" of Japan's exports, a high minimum wage - or some other increase in demand. I don't see any of those as likely.
But I want to buy a new Prius!
written by Bob Marshall, March 14, 2014 4:22
The cost of a Prius here in Bellingham, WA, is the same as it was 10 years ago. I plan to trade in my 9 year old 2G for the 5G model with the new battery due out next spring, but I have a lot of friends in Japan whose children need jobs, so my feelings about the success of this effort to boost prices in Japan are mildly mixed....

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.