Modern money theory and its challenges Sayuri Shirai

Modern monetary theory (MMT) has recently gained prominence in light of doubts about the effectiveness of monetary policy in addressing economic shortfalls. This column assesses the implications of implementing the theory’s policy prescriptions, and the challenges it presents in the case of Japan – an economy that some have argued has already been subject to such policy. Japan’s labour shortages and low inflation mean modern monetary theory’s fiscal stimulus suggestions may be harder to implement than they initially seem....

Stephanie Kelton was recently in Japan talking up MMT. This is a response. It is a serious article on MMT that gets the outline reasonably correct and offers comments on its applicability to conditions in Japan. It's a should-read.

VoxEU
Modern money theory and its challenges
Sayuri Shirai | Professor, Keio University; Visiting Scholar to ADB Institute; and, former Board Member, Bank of Japan

Bill Mitchell — Japan still to slip in the sea under its central bank debt burden

President Trump banned a CNN reporter only to find his position overturned by the judicial system. Well CNN is guilty of at least one thing – publishing misleading and alarmist economic reports about Japan. In a CNN Business article last week (November 13, 2018) – Japan’s economy has a $5 trillion problem – readers were told that the Bank of Japan has no “dwindling options to juice growth if a new crisis hits” because “it’s now sitting on assets worth more than the country’s entire economy”. The real story should have been that the Bank of Japan continues to demonstrate the categorical failure of mainstream macroeconomics and, conversely, ratify the core principles of Modern Monetary Theory (MMT). That is what the Japanese experience since the early 1990s tells us. And all the stories about special cases; cultural peculiarities, closed markets, etc that the mainstream economists wheel out when another one of their predictions about how Japan is about to sink into the sea as a result of its public debt levels, or that interest rates are about to go through the roof because of the on-going and substantial fiscal deficits; or that inflation is about to accelerate because of the massive monetary injections; and more, are just smokescreens to divert our attention from the poverty of their analytical framework. The Japanese 10-year bond trade is called the ‘widow maker’ because hedge funds who try to short it lose big. The Japanese monetary system is my real-time, non-linear economic laboratory which allows all the key macroeconomic propositions to play out live. And MMT is never very far off the mark. Try juxtaposing New Keynesian theory against Japan – total dissonance....

Bill Mitchell – billy blog
Japan still to slip in the sea under its central bank debt burden
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Brian Romanchuk — Japan And The Costs Of Bond Yield Control

The dangers of distorting free market interest rates is one of the bits of market folklore that keeps getting passed around. There is actually not a whole lot of data to defend this view; it is best viewed as faith-based reasoning. This topic is particularly interesting in the case of Japan. I am somewhat agnostic on this issue; I do not see particular risks from manipulating the yield curve in the current environment, yet I can see some plausible dangers.

This article was triggered by the article "Bank of Japan once again shows who calls the shots," by Bill Mitchell, one of the leading Modern Monetary Theory (MMT) economists. In addition, I had a discussion about this topic with someone doing some research awhile ago. Rather than re-hash Professor Mitchell's points from the MMT perspective, I will put on my "generic market analyst" hat and give a description of the issue from a more theory-agnostic perspective....

Bond Economics
Japan And The Costs Of Bond Yield Control
Brian Romanchuk

Bill Mitchell — Bank of Japan once again shows who calls the shots

On August 1, 2018, the 10-year Japanese government bond yield, shot through the roof (albeit a very low one). Yields shifted from 0.05 per cent on July 31 to 0.129 on August 1, which was the largest one-day rise since July 29, 2016 (when the yield rose 0.101 per cent). The Financial Times article (August 1, 2018) – Japanese bond market jolted as traders test BoJ resolve – wrote that “traders wasted no time in testing the Bank of Japan’s resolve to loosen its target range for the debt benchmark”. So what was that all about? And what key point does it demonstrate that seems to be lost on mainstream economists who continually claim that government debt is, or can become a problem once bond markets demand higher yields? The Japanese bond market has shown once again that private bond traders cannot set yields on government bonds if the central bank intervenes. Next time you hear some mainstream economist claiming a currency issuing government is running deficits at the will of the investors (read bond markets) politely tell them they are clueless. Japan once again provides the real world Modern Monetary Theory (MMT) laboratory – every day it substantiates the underlying insights contained within MMT and refutes the core mainstream propositions. The bond market over the last month or so demonstrates that the Japanese government is increasingly net spending by using credits created by the Bank of Japan, whatever else the accounting structures might lead one to believe. With inflation low and stable, these dynamics surely put paid to the various myths that a currency-issuing government can run out of money and that central bank credits to facilitate government spending lead to hyperinflation....

Bill Mitchell – billy blog
Bank of Japan once again shows who calls the shots
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Bill Mitchell —Band of Lower bond yields do not save the Japanese Government money

I was going to write about the situation in Timor-Leste after its national elections were held on Saturday. But I will hold that over for another day as I get some more information. So today, I think we can learn a lot from an issue raised in the Bloomberg article (May 14, 2018) – Kuroda’s Stimulus Saves Japan $45 Billion, Easing Debt Pressures – which discusses the QE program in Japan and introduces several of the basic errors that mainstream financial commentators make when discussing these issues. The article traverses all the usual suspects including the misconception that numbers in official accounts are ‘costs’ to government and that smaller numbers in official accounts mean the government can put larger numbers in other accounts than it might have been able to. These articles are as pervasive as they are erroneous. Hopefully, as the precepts of Modern Monetary Theory (MMT) spread and are understood more journalists will endure scrutiny of the rubbish they write and the public commentary and debate will progress towards a more reasonable – realistic – appraisal of what is going on in the world of finance and money. This article is one of the worst I have read this year so far. And there have been some real terrors!

This is about government finance rather than Japan alone.

Bill Mitchell – billy blog
Lower bond yields do not save the Japanese Government money
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Bill Mitchell – Bank of Japan’s QE strategy is failing

On April 20, 1018, the IMF presented its – Asia and Pacfic Department Press Briefing – in conjunction with the release of the April 2018 World Economic Outlook and the upcoming (May 9, 2018) release of its Asia and Pacific Regional Economy Outlook. The Deputy Director of the Asia and Pacific Department, one Odd Per Brekk, told the audience that Japan should continue its Quantitative Easing (QE) program and maintain transparency in its purchase volumes so as to ensure the strategy to accelerate the inflation rate up to the 2 per cent target is achieved. Part of this strategy involves shifting inflationary expectations from their recent low levels. Critics of the program shriek that the asset base of the Bank of Japan is now approaching the nominal GDP level and given that a high proportion of those assets are comprised of Japanese Government Bonds, that reversing the strategy eventually will be difficult and risks involving the Bank is huge losses, which might render it insolvent. Insolvency has no application in the case of a central bank which can never go broke. Further, the Bank never needs to reverse the QE purchases. There is no relevance in the rising assets to GDP ratio. The problem is that QE will not achieve the desired end. The Bank has expanded its QE program significantly yet the inflation rate and inflationary expectations remain well below the 2 per cent target. They will eventually work out that the mainstream theory that predicted otherwise is erroneous.

Bill Mitchell – billy blog
Bank of Japan’s QE strategy is failingBill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Helene Lee and Asani Sarkar — The Role of Central Bank Lending Facilities in Monetary Policy

Central bank lending facilities were vital during the financial crisis of 2007-08 when many banks and nonbank financial institutions turned to them to meet funding needs as private funding dried up. Since then, there has been renewed interest in the design of central bank lending facilities in the post-crisis period. In this post, we compare the Federal Reserve’s discount window with the lending facilities at three other major central banks: the Bank of England (BoE), the European Central Bank (ECB), and the Bank of Japan (BoJ). We observe that, relative to the other central banks, the Fed’s discount window is less integrated into the monetary policy framework. In a follow-up post, we will discuss differences in the central banks’ counterparty and collateral policies.

FRBNY — Liberty Street Economics
The Role of Central Bank Lending Facilities in Monetary Policy
Helene Lee, senior associate in the Federal Reserve Bank of New York’s Markets Group, and Asani Sarkar, assistant vice president in the Bank’s Research and Statistics Group

Bill Mitchell — More fun in Japanese bond markets

The Japanese bond market has been very interesting in the last week proving yet again that private bond markets cannot set yields on government bonds if the government does want then too. Next time you hear some mainstream economist claiming a currency issuing government is running deficits at the will of the investors (read bond markets) politely tell them they are clueless. Japanese once again provides the real world Modern Monetary Theory (MMT) laboratory – every day it substantiates the underlying insights contained within MMT and refutes the core mainstream propositions. The financial media referred to the Bank of Japan as putting a whipsaw to the bond markets, which in context means that the BoJ is forcing the ‘markets’ into confusion (Source). The bond markets have misinterpreted recent Bank of Japan conduct in the JGB markets (less purchases than expected, and even missing a scheduled buy up) as a sign that the Bank was weakening on its QQE commitment from last September that it would hold the 10-year JGB yield to zero and thereby allow the longer investment rates to fall. Why they doubted that commitment is another matter but within a few days over the last week the Bank demonstrated that: (a) it remains committed to that target; and (b) it has all the financial clout it needs to enforce it; and (c) the bond market investors do not call the shots....

Bill Mitchell – billy blog
More fun in Japanese bond markets
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

The yen rally this morning is ridiculous

Huh???

As you know I have been bullish on the yen for a while and it has rallied for the past three months, but two weeks ago I said to sell it and we caught a nice, 400 pip profit going short.

This was all based on strategic, calm, trading and an MMT understanding of what was happening.

However, we just saw something earlier today that shows you why people lose money. The yen surged because the BOJ decided to keep monetary policy unchanged. So?

That unleashed a massive 300 point move down in USDJPY.

People trade like this?

Yup. And that's why you can make so much money, trading against emotional, clueless, fools.

The lack of action by the Bank of Japan does not change the fact that Japan is putting through a major fiscal stimulus. They "front loaded" all their public works' spending ot the first half of their 2016 fiscal year (Apr-Sep, basically). It's about a $110b equivalent of spending. And they are probably going to pass a supplemental budget to deal with the recent earthquake.

What does this mean? It probably means USDJPY goes back up again and the fools who sold this pair this morning, on nothing, will get their money taken from them. That's as it should be.

Jeff Spross with Scott Fullwiler — Could Bank of Japan's crazy gambit actually work?

Jeff Spross asks Scott about the effect of negative rates in Japan.

The Week
Could Bank of Japan's crazy gambit actually work?
Jeff Spross with Scott Fullwiler

Bill Mitchell — The folly of negative interest rates on bank reserves

On Friday (January 29, 2016), the Bank of Japan issued a seven-page document – Introduction of “Quantitative and Qualitative Monetary Easing with a Negative Interest Rate” – which left me confounded. Do they actually know what they are doing or not? For years, the liquidity management conducted by the operations desk at the Bank has been impeccable, in the sense that they have maintained near zero interest rates in the face of growing fiscal deficits. There was always some doubt when they were the early users of quantitative easing which many claimed was to provide the banks with more reserves so that they would increase their lending to the private domestic sector in order to stimulate growth, after many years of rather moderate real performance to say the least. Of course, banks are not reserve constrained in their lending so the the only way that this aspect of ‘non-conventional’ monetary policy would be stimulatory would be if investment and purchasers of consumer durable were motivated to borrow at the lower interest rates that the asset swap (bonds for reserves) generated. The evidence is that the stimulus impact has been low and that there are many other factors other than falling interest rates governing whether borrowers will approach their banks for loans. In their latest announcement, the logic appears to be that by reducing reserves they will induce banks to lend more. Go figure that one out!

Bill Mitchell – billy blog

The folly of negative interest rates on bank reserves

Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Frances Coppola — Japan's negative rates: the China connection

There's more to Japan's negative interest rate policy than meets the eye.

The race to the bottom is on.

Coppola Comment
Japan's negative rates: the China connection
Frances Coppola

Marshall Auerback — The Limits To Quantitative Easing

Based on anecdotal evidence this is seems correct to me. QE takes safe assets off the table to the detriment of the financial planning of older people chiefly interested in funding retirement securely.

Macrobits by Marshall Auerback
The Limits To Quantitative Easing
Marshall Auerback

Marshall Auerback — Why Should The BOJ’s ‘Shock And Awe’ Work Any Better This Time Around?

By 1998, the Japanese government began to realise the errors of their ways and started to spend again, with the result that the economy began to grow (and the deficits came down as tax revenue increased) until the US recession in 2002 contributed to an export collapse. Once exports recovered and public spending support resumed, the economy then grew relatively strongly despite the lower sovereign debt ratings. 

The same thing could happen today if Japan pursues a policy of growth, not fiscal consolidation. The bond buying program might be pleasing for the global stock market community, but it’s an irrelevance as far as Japan’s economy goes.

Macrobits by Marshall Auerback
Why Should The BOJ’s ‘Shock And Awe’ Work Any Better This Time Around?
Marshall Auerback

Jeff Cox — Markets are still addicted to money printing

Rational expectations?

Friday's stock surge provides yet another reminder that when it comes to moving the market, there's nothing like a little old-fashioned money printing. 

What waits on the other side—asset bubbles, inflation, the prospects for still greater wealth disparity—remains, of course, an issue for another day. 

The important thing is that the market wants what the market wants…

CNBC NetNet
Markets are still addicted to money printing
Jeff Cox | Finance Editor

Randy Wray — WSJ Warning on Japan’s Fiscal Sphincter

Oh My Goodness: debt financing by the central bank! Could cause bond yields to rise! Vigilantes on strike.

No, you morons. Government deficits always increase reserves in the banking system. That places downward pressure on the overnight interbank lending rate. Selling bonds normally relieves that pressure. But if you’ve already achieved ZIRP (zero rate target) then you don’t need to sell them.

Economonitor
WSJ Warning on Japan’s Fiscal Sphincter
L. Randall Wray | Professor of Economics, UMKC

Zero Hedge — Richard Koo Warns Of "Beginning Of The End" For Japanese Economy

More on inflation targeting.

Seems that no one realizes that the central bank can control the yield curve by announcing price rather than quantity.

Zero Hedge
Richard Koo Warns Of "Beginning Of The End" For Japanese Economy

Submitted by Tyler Durden

Soros on Japan — Video

George Soros on Adair Turner's Groundbreaking Keynote and Why BOJ Stimulus is Risky

from INET Blog

BOJ "money printing" explosion, North Korea threatening nukes and gold goes down!

I wonder how Schiff, John Paulson and the other gold bugs are feeling right now? Gold down to $1540 even as the Bank of Japan announce new QE and North Korea threatens a nuke attack!

Gold...ha!

Lord Keynes on how Japan avoided the Great Depression

In other words, Japan was using a policy we would now associate with Modern Monetary Theory (MMT). From November 1932, the government’s deficit was financed by issuing bonds directly to the Bank of Japan, and then later the Bank sold these bonds to private banks. Not only was there no hyperinflation, but no significant inflation.

Social Decmocracy for the 21st Century
Takahashi Korekiyo and Fiscal Stimulus in Japan in the 1930s
Lord Keynes
(h/t Philip Pilkington on FB)

Japan got it right then, but now, not so much as they focus on monetary policy rather than fiscal.