Wednesday, September 30, 2015

Doubling Down on Abenomics

So it appears the Bank of Japan (BoJ) had already doubled down on Abenomics before the prime minister announced a new NGDP level target. In late 2014, the BoJ said it would increase the growth of the monetary base and by implication the number of assets it would purchase. 

Here is the original BoJ announcement on Abenomics in early 2013 (my bold):
The Bank will achieve the price stability target of 2 percent in terms of the year-on-year rate of change in the consumer price index (CPI) at the earliest possible time, with a time horizon of about two years.In order to do so, it will enter a new phase of monetary easing both in terms of quantity and quality. It will double the monetary base and the amounts outstanding of Japanese government bonds (JGBs) as well as exchange-traded funds (ETFs) in two years, and more than double the average remaining maturity of JGB purchases...The Bank of Japan will conduct money market operations so that the monetary base will increase at an annual pace of about 60-70 trillion yen.1
And here is footnote one:
Under this guideline, the monetary base -- whose amount outstanding was 138 trillion yen at end-2012 -- is expected to reach 200 trillion yen at end-2013 and 270 trillion yen at end-2014.
The BoJ got close. The monetary base hit 267.4 trillion yen at the end of 2014. The BoJ did not, however, hit its inflation target. So it announced in October, 2014 it would increase how fast the monetary base would grow:
[T]he Bank of Japan decided upon the following measures.
(1) Accelerating the pace of increase in the monetary base by a 5-4 majority vote. The Bank will conduct money market operations so that the monetary base will increase at an annual pace of about 80 trillion yen...
So the BoJ decided to double down its bets on Abenomics by growing the monetary base an additional ¥10 trillion a year for a total of  ¥80 trillion per annum. This non-trivial pick up in growth can be seen in the figure below under the 'Abe II' label:

So maybe Japan is more determined than we realized to make this reflation experiment work. Maybe there is more credibility to Shinzo Abe's new NGDP level target than we first imagined. Abenomics has, after all, consistently raised aggregate demand as noted in my last post. The key is not to repeat the mistake made with Japan's first QE program by reversing the monetary base growth as is seen in the figure above. 

P.S. Both the core inflation and rate deflator inflation rate show sustained rises. This is not good for Neo-Fisherism.


  1. In your previous post you wrote:

    "One way to check whether the monetary base expansion is expected to be at least somewhat permanent is to see whether nominal spending has been rising."

    How can we conclude expected permanency by looking at ngdp growth? Money could easily enter the system permanently and not result in NGDP growth it seems.

    1. CMA, if the monetary base is expected to be permanent and not sterilized by IOR then at some point in the future it will be used in transactions. The expectation of this happening also means an expectation of a higher price level in the future. And, the expectation of a higher price level in the future, in turn, will create the incentive for the money to be spent in the present and raise NGDP. This is a fairly standard point in macro, not unique to me. See this older post for more on it:

      This understanding is why Japan's QE didn't raised NGDP between 2001-2006. It was seen as a temporary increase. Abenomics, on the other hand, did raise aggregate demand growth which suggests that at least some of monetary base injection is expected to be permanent.

    2. I think its a too much to assume that just because money will enter the system permanently that the demand for money will decrease. If investment returns are too low people may just simply hold on to money to a greater extent.

  2. Love your blog. Quick question though. I understand when economy is in liquidity trap/ZLB but aggregate demand is still not picking up, we need to lower real interest rate by increasing expected inflation. We need, as Paul Krugman puts it, "credible promise to be irresponsible" by central bank. That is, permanent expansion of monetary base. Promise that even after inflation goes up, the central bank won't pull back right away. Is "permanent" means literally forever? or the central bank should pull back its monetary base when inflation is at its "appropriate level"? I am just confused with the term "permanent". Thank you.
    P.S: I am a student from Asia trying to self learn economics. Just wanted to say Thank you for your blog.

    1. Jimmy, what is truly permanent is the commitment to permanently reflate the economy by whatever means necessary. That may mean a permanent injection of the monetary base. It may also mean the public permanently raising the velocity of money based on a belief the government is credibly committed to reflating the economy. Or some combination of both.

    2. This comment has been removed by the author.

  3. David,
    Isn't employee compensation coming down again in Japan?

    When compensation was rising, the probability increased that their call rate would rise with core inflation. When the call rate changes, Neo-fisherism does not apply since it only applies when the call rate is seen as fixed well into the future. As compensation comes back down, Neo-fisherism may come back into play meaning that core inflation will come back down too.

    And didn't core inflation fall again in Japan?

    yes, it was slightly negative in August.

  4. TravisV here.

    Mr. Beckworth, you might be interested in these passages from Bernanke’s new book (Chapter 19 on QE1). I think they contradict each other.