A Minute With The Minister In The Garden

On Monday at the Quatorze Juillet reception at the French Embassy I had a remarkable chance to speak one-on-one with a member of the Cabinet, Minister A. After an exchange of name cards and my brief self-introduction, I asked him a simple question: on a scale of 1-100, how would he rate the performance of the Abe Cabinet? His response was that it should receive a score above 90%, first for its ability to execute on its program, second for Mr. Abe's identifying from the outset Japan's need to exit from deflation. A prime minister's committing himself to ending inflation was a key achievement in and of itself, and Mr. Abe deserves credit for his identification of the problem. All indications are, the Minister continued, that the policies initiated by Mr. Abe's commitment to exiting deflation are taking effect.

What was striking in my conversation with the minister, aside from his extreme kindness in offering his opinion to lowly me, was his expression of the Abe government's commitment to the idea of exiting deflation as a goal without his ever mentioning the target rate.

I have been wondering about the government's actual stance on the goal of an exit from deflation. Richard Katz has mocked the idea of targeting an inflation rate, likening it to trying to cure a fever by putting ice on a thermometer (Link). Katz's love of his metaphor, and it is a good one, possibly leads him away from understanding the Abe's government's true goal. My sense of is that the stated figure of 2% annual CPI is more of a placemark -- a stand-in for a more iterative and elusive figure where the Japanese economy is on a self-sustaining growth path in spite of chronic deflationary pressures.

It may be that the Abe program, at least on the monetary side, is Shirakawa defeatism turned on its head and hidden under a faux Taylor rule cloak. Former Bank of Japan Governor Shirakawa Masaaki's feeling that there is no way to generate 2% inflation may be correct -- but the fact that the task of hitting 2% inflation is impossible is the reason why you try to do it. If you cannot -- cannot -- fight deflation through monetary means, where is the downside from trying anyway? Sure, you will have to come up with some cover story about the reasons why you are not hitting the target rate at the predicted time. However if GDP and wage growth have ignited in the meantime, who is really going to care?

Paul Krugman back in the mid-1990s was advocating that the Bank of Japan pull Japan out of its rut though a commitment to unlimited irresponsibility -- that the BOJ promise to do anything to pull the economy from out of the liquidity trap. Promising to be irresponsible with the nation's money is a tough sell in any democratic state, which is probably why the idea never caught on.

However, a government committing oneself to an impossible-to-achieve goal does not sound half as crazy as unlimited irresponsibility, even though it is effectively is the same thing.

So come next year on the 14th, if I meet the minister (he may not be a minister at that time, we shall see what happens in September) again under the tent in the garden, and the CPI inflation rate is not at 2%, and if he again grants me a minute of his time, I will ask him what score he would give, on a scale from 1-100, for the Abe administration's fight against deflation.

A More Serious Slapping Around of Abenomics Cheerleading

Edward Hugh has a sharp review of the negative view of Abenomics, or perhaps more properly the dismissive-as-irrelevant-and-possibly-quite-harmful view of Abenomics:

The Real Experiment That Is Being Carried Out In Japan

Particularly thought-provoking are the quotations from Keynes, showing both the incredible brilliance of the man and the continuing validity of the old saw, "There is nothing new under the sun."

I agree with almost everything in the post, particularly with the quotations from the speeches of former Bank of Japan governor Shirakawa Masaaki, whom the Kool Kids in this blessed land's business and media elites all feel free to disdain and revile. Shirakawa is revealed to be who he is and what he always was: a central banker blessed with intelligence, humility and a conscience.

With all that is good (and there is a lot of it) I think Hugh does himself a disfavor with the cheap shot at the what may be the most important goal of the creation of inflationary expectations: pressing savers to convert their assets in to real goods or put them into higher risk/higher return investments. A critic would point out that "Uh, that's sort of the point of the program. Duh."

The demographic angle of the story is that while there is a vast pool of cash that could be deployed in lifting the economy to a higher level of activity, almost all of it is in the hands of persons over 60 years of age. Seniors are very, very conservative about their assets and cash, clinging to low-or-negative return real estate or money kept in bank accounts...or in the safe at home.

The government is trying some direct methods to get older citizens to turn over their savings to younger citizens, the most famous/infamous being the tax free accounts for the education of grandchildren (a plan which has been widely derided as just a tax avoidance scheme for the extremely wealthy). Increased taxation of the assets of retirees would be the one, absolutely effective, politically lethal (those damn retirees vote, a lot) solution.

Debasing the currency and creating the desire to convert cash into something that is meaningful and useful is an actual, non-ridiculous goal of induced inflation...the caveat being "but what if instead of increased consumption and domestic investment the result of debasing of the yen is capital flight, with savers sheltering the current value of their money in overseas accounts and assets?"

I guess we have to keep an eye on the yen. I am sure if someone popped an inquiry into Richard Katz's mailbox he would have something to say about what the yen level should be, using trade-adjusted figures.

Later - Richard Katz responds in comments. He corrects my incautious claim that he would know at what level the yen should be.

No one knows this, save, supposedly Mr. Market.

What Richard Katz can tell you is what the long-term average real exchange rate has been, and whether or not the Abe governments disengenuous program to crush the "high yen" has firm intellectual roots.

Nota Bene: All comments to Shisaku are moderated, except my own.

That Aso Slip Of The Tongue

Okumura Jun wonders (Link) why I did not dance a jig over Finance Minister Aso Taro's "my brainstem does the talking" attempt to link dying with dignity and the cost of life-extending technologies. (Link)

There are a number of reasons.

First is I like Aso-san, a lot. He is by his own admission a simpleton, the worst student he ever met. While a holder of reactionary views, he is inconsistent, liking many things other reactionaries find corrupt and immoral. I admire and cherish his insouciance and his patriotism -- qualities so lacking in most of the fanatics whose company he keeps.

Second, Aso has competition. While he has earned most of the attention this week for both his "hurry up and die" comment and for losing his shirt in negotiations with Bank of Japan governor Shirakawa Masaaki (Link), economic revitalization minister Amari Akira is probably still ahead on points. From his wandering off message as regards the strength of the yen (Link) to his incredibly bizarre four strategic targets for Government of Japan economic policy (Link) Amari seems intent on embarrassing himself and his boss.

The Abe Cabinet and the Liberal Democratic Party leadership are full of ticking time bombs: the poverty-scarred Shimomura Hakubun at MEXT, policy research chief Takaichi Sanae (Link), National Public Security Commission head Furuya Keiji, Shindo Yoshitaka at MIC...

Jumping all over Aso for his well-intentioned gaffe will only numb audiences in advance of the waves of nonsense that will be issuing from the Friends of Shinzo over the coming days, weeks, months and years.

Which brings up the third reason why I let Aso's comment slide: there is so much that is substantively wrong in what Abe and Company want to do to Japan that to pick apart a gaffe is to be complicit in a diversion of attention. That Aso said what he said does not reveal a heretofore dark hidden agenda or mindset anymore than Yanagisawa Hakuo's baby-making machines metaphor did (Link). What we learned is that Aso cannot express a thought to save his life -- which we already knew.