Given yesterday’s detailed monetary policy analysis, I am using today to present an array of news items and some brief analytical thoughts on central bank monetary policy. The latter is based on a very interesting speech that the governor of the Bank of Japan gave in Nagoya earlier this week. The juxtaposition with the way the Western central banks are behaving at present is stunning. There is also some self promotion and some announcements. Then we get to listen to Ron Carter. A good day really.
Monetary policy in Japan
On November 6, 2023, the Governor of the Bank of Japan, Ueda Kazuo gave a speech to ‘business leaders’ in Nagoya – Japan’s Economy and Monetary Policy.
After the RBA had unnecessarily raised interest rates again this week and trotted out a spurious justification to the public, it was interesting to juxtapose the mindset of the Bank of Japan, which has not raised rates at all since this current inflationary episode began.
The strategy of the Bank of Japan is very different to that of the Western central banks.
The latter have been attempting to scorch the demand-side of their economies with interest rate rises, designed to push up unemployment to reach some ill-defined NAIRU, because they claim that wages growth may break out.
As inflation has been falling significantly over the last 12 or more months, the justification for continued rate rises has all been about expectations formation.
The longer they leave inflation above some arbitrary threshold, so the story goes, the higher is the chance that workers’ demands will push wages growth up and the inflation dynamic will shift to a wage-price spiral.
There has been little evidence to support the break out notion.
Price expectations around the world appear to be stable or falling.
Of course, expecting these central bank boards, which are stacked full of people who have limited understanding of how the monetary system actually operates, to be informed by actual facts would be a step too far.
They are imbued with New Keynesian macro perspectives, which are divorced from reality.
In contradistinction, the Bank of Japan is holding rates around zero and controlling the bond market to keep government bond rates stable across the yield (maturity) curve, exactly because they want to encourage much faster wages growth to underpin a higher stable inflation rate.
In the West, the thought of accelerated wages growth is met with fear and derision from corporate types and government.
In Japan, it is the aim of policy makers.
A parallel universe really.
The Governor told his audience that:
Two forces are at work behind the inflation rate remaining relatively high for the time being. The first force is inflationary pressure resulting from the pass-through of the rise in import prices to consumer prices. The rise in import prices, including of energy and grains, has spread to consumer prices with a time lag. The second force is inflationary pressure associated with the mechanism whereby wages and prices interact and increase on the back of continuing economic improvement.
The Bank believes the first force pressures are abating as the supply chains normalise after the disruptions early in the pandemic.
They understand that “the first force will persist” for longer than previously anticipated because of the new round of fuel price increases.
But the annual price pressure from these factors are in decline:
… the effects of the first force pushing up prices are likely to gradually wane, even if a rise in crude oil prices, for example, causes that process to take time.
He then turned his attention to the ‘second force’:
… the Bank expects that underlying CPI inflation will increase gradually toward 2 percent as the second force pushing up prices — namely, the virtuous cycle between wages and prices — strengthens.
Note – ‘virtuous cycle’.
He noted that some firms are now changing the behaviour that prevailed during the long deflationary period and awarding wage increases for their workers.
The Bank expects that behaviour will spread throughout the economy and provide Japan with the means to escape the deflationary mindset.
The Governor said that “medium- to long-term inflation expectations have risen moderately, which seems to have influenced firms’ wage- and price-setting behavior”.
But the Bank is still highly uncertain as to whether the deflationary cycle will be broken.
As a result:
… the Bank’s basic thinking on the conduct of monetary policy is that it will patiently continue with monetary easing under the framework of yield curve control, aiming to support Japan’s economic activity and thereby facilitate a favorable environment for wage increases.
Light years away from the way the West thinks.
And inflation is dropping much more quickly in Japan than elsewhere without the damaging impact of the interest rate hikes on income and wealth inequality.
So when someone says that the Western central banks were faced with a TINA situation on rates, ask them what they know about Japan.
It once again demonstrates an alternative path is possible in a modern monetary economy, which delivers superior outcomes.
Living Legends no less – Warning self promotion
On Tuesday (November 7, 2023), the national newspaper – The Australian – published a special report which discussed the results of some analysis the other day under the title – Research 2024 – Australia’s living legends of research.
The Report says the list of researchers are Australia’s:
… best known intellectual achievers … We have called the people on this list “living legends” because they attract worldwide attention by virtue of their ideas although many of them have little in common with each other, because they are in very different fields.
If you scan the list you will find one economist – an MMT economist no less.
The Report says that:
The list does include people who have been in the public eye like Nobel prizewinners Barry Marshall, Elizabeth Blackburn, Robin Warren, J.M. Coetzee and Brian Schmidt. But it also includes eminent scholars such as David Chalmers, Raewyn Connell, Christopher Clark, David Christian, Bill Mitchell and Cordelia Fine, even though they are not by any means household names.
I was surprised but very happy.
Not a mainstream economist in sight.
If you cannot access the report via the newspaper, here is the media version – Australia’s living legends of research – that the University of Newcastle received as part of their media monitoring subscription.
Episode 4 of the Smith Family Manga – hits the press tomorrow
In Episode 4, bank analyst Chris turns up at the Smith’s and Kevin asks for support in his on-going argument with his father Ryan as to whether taxpayers fund government spending.
Ryan asks Chris who Ben Berstanke is, and, in doing so reveals his ignorance.
It doesn’t turn out well.
Only Ryan refuses to understand how the system works in reality.
Book Launch – Tokyo, November 17, 2023
On Friday, November 17, 2023, we will be launching my new book in Tokyo with my co-author Professor Satoshi Fujii from Kyoto University.
Satoshi was the former senior advisor to Shinzo Abe but resigned in protest after they pushed up sales taxes again to ‘rein’ in the deficit.
The book (currently in Japanese) is entitled – Proactive Fiscal Policy in the Age of Inflation – and is the result of our collaboration over the last 12 months.
You can access the information at: 藤井聡＆ビル・ミッチェル 新刊発刊記念セミナー開催決定！ (translation: Satoshi Fujii & Bill Mitchell A seminar to commemorate the release of the new book will be held!)
Tickets are 3,000 yen but you get a signed copy of the book as part of the registration fee.
The organisers have just increased the size of the audience to 150 due to demand for tickets.
The event kicks off at 19:00 and will end at 21:00.
Location: Hotel LePort Kojimachi – 2-4-3 Hirakawacho, Chiyoda-ku, Tokyo 102-0093 (central Tokyo not far from the Diet building).
Students get the book for 2,500 yen.
So if you are in Tokyo on the 17th and would like to join the event, it would be great to see you.
Music – Ron Carter
This is what I have been listening to while working this morning.
I read a great interview with the famous American double bass player – Ron Carter – the other day.
He was interviewed by the UK Guardian (November 3, 2023) – Ron Carter, jazz’s most prolific bassist: ‘Our band was a laboratory – and Miles Davis was head chemist’ – which I found really interesting, especially the struggles he faced as a black musician to break into the scene.
He only moved over to jazz when his high school orchestra would never select him to play his cello at public events.
He learned soon after that he would not get hired by a classical orchestra as a cellist or double bass player, so he shifted to jazz and we are all better off because of that decision.
This is one of my favourite tracks – A Night in Tunisia (written by Dizzie Gillespie and Frank Paparelli, although the latter didn’t really contribute).
It was recorded on October 6, 1977 and appeared on the album – Direct from L.A..
It wasn’t the most economical album I ever purchased, running for 29 minutes only, but the quality is beyond reproach.
I love Ron Carter’s playing.
The album was marketed under the name of the – Great Jazz Trio – which included:
1. Tony Williams – drums.
2. Hank Jones – piano.
Three players making a lot of sound.
The feature of the song was the departure by Ron Carter from a traditional walking bass line with even quarter notes.
The technicalities are not for this segment but you can feel the sound of the oscillating pattern very clearly.
Instead, he deployed what is known as an – Ostinato – bass line –
That is enough for today!
(c) Copyright 2023 William Mitchell. All Rights Reserved.