On May 20th, official data from Japan reported that Q1 GDP was up 2.4% YOY.
This is good news for Japan, a nation which managed to post only scant annual growth of 1 percent between 1992 and 2012, as it struggled to survive the devastating impact of deflation. Over those 20 years, Japan’s stock market lost about 80% of its nominal value, as did property values. The nation became deeply indebted, as it tried fiscal stimulus to revive the economy. The yen soared in value against the U.S. dollar.
The period from 1992 was a disaster for Japan, a long real-world experiment that destroys the erroneous concept that deflation and a strong currency are a cure for all economic ills.
Congratulations are in order for the current Bank of Japan, led by the courageous Governor Haruhiko Kuroda. It has shown resolve, in sharp contrast to the indecisive, feeble troupe who flock to the Federal Open Market Committee, the lugubrious policy-making board of the U.S. Federal Reserve.
In contrast to the stop-and-go FOMC, Bank of Japan’s Kuroda has been buying $80 billion in bonds per month since 2013, and has said he would do more if necessary to hit his 2% inflation target (IT).
And yes, the Japanese man in the streeet is benefitting too: “Wage growth is now positive, ending years of wage deflation,” Christopher Mahon of Baring Asset Management recently told Barron’s. Mahon says buy Japan.
If I have criticism for the BoJ, it is that they should have a nominal GDP target, not an IT—more on that later.
QE in the U.S.
When the Fed finally did try the right kind of quantative easing (QE)—QE3, which was open ended, results dependent—it worked in the United States. After peek-a-boo with QE 1 and QE2, the Fed in September of 2012 said it would buy $40 billion per month, and later upped that to $85 billion a month, until conditions improved. That policy roughly worked (although note that BoJ is buying $80 billion of bonds per month in an economy half the size of that of the U.S.).
Yet unlike the BoJ stalwarts, the FOMC folded up their QE tents when inflation was still below target, ending QE3 in October 2014. In this way, the FOMC sent a signal to Wall Street and markets everywhere: seeking robust economic growth is not worth risking inflation even close to 2%.
Since the Fed quit QE, the U.S. benchmark stock index, the DJIA, has drifted sideways for fleeting gains, while first half 2015 GDP growth may be flat , with just a little bad luck.
The U.S. is in the same “stall speed” that defined Japan for two decades.
And For What?
The Fed is obsessed with a nominal index of prices, the PCE deflator.
But as Martin Feldstein pointed out recently in the The Wall Street Journal, government inflation indices are imprecise, and may read a few percent high. The Fed may have the nation in the grip of Japan-style deflation now.
Feldstein also said government policies should be growth-oriented, more so than today.
Amen—I hope the Fed is listening. And watching. Watching Japan, that is.
And the IT? Well, Marcus Nunes is right, as he recently blogged: The Fed should actually target nominal GDP. But if they even had the resolve to hit the IT they have, or preferably a slightly higher one, that would be an improvement.