This is not really my area, but how strong is the evidence that Japan’s monetary policy has been terribly misguided?
Japan’s central bank has had to face the uncommon and challenging situation of a declining working age population. This is sufficiently unusual that they can’t learn a lot about how to best to handle it from the historical record.
During Japan’s “lost decade” (1992-2007), GDP per working-age adult grew at 1.4%/yr, which isn’t much slower than the 2.0% rate in the US (the end point of a financial bubble for the US, arguably spurred by excessively low interest rates).
We can add to this list of partial successes that while they’ve certainly undershot their inflation target, they haven’t had a repeat of their inflation breakout in the early 70s (https://tradingeconomics.com/japan/inflation-cpi). Lost control of inflation expectations is not a pleasant disease to treat. Their GDP per working hour has simply roughly tracked the OECD average—again, half points for that: https://data.oecd.org/lprdty/gdp-per-hour-worked.htm
While they may well have done better than this with more experimental or heterodox monetary policy, central banks tend to be quite risk averse and slow to change. Historically the downsides of messing up your monetary policy have been very large, so they are inclined to accept the ‘devil they know’ rather than shoot for the ideal policy. Whether being so risk-averse is the right approach just seems unclear to me.
Furthermore, if they changed their targets, methods or processes too frequently, their forward guidance could lose credibility.
I don’t mean to say that Japanese monetary policy was correct ex post or even ex ante, just that if this was chosen as a slam dunk instance of ‘experts’ clearly messing up, it doesn’t seem so strong to me.
To add to this, we should also bear in mind that GDP growth is a bad metric for comparing countries with low population growth with countries with high population growth.
For one western country with high population growth, I calculated that 20-25% of GDP is devoted just to catering for the population growth. New roads, hospitals, houses, offices, power stations, phone lines, offices, factories etc etc. So for Japan with hardly any population growth, GDP overstates the goods available for consumption versus the US, with high population growth. In effect the US has to produce a lot just to stand still.
As Japan has transitioned to low population growth, its effective ‘consumption-available’ GDP growth has been far higher than it looks.
This is not really my area, but how strong is the evidence that Japan’s monetary policy has been terribly misguided?
Japan’s central bank has had to face the uncommon and challenging situation of a declining working age population. This is sufficiently unusual that they can’t learn a lot about how to best to handle it from the historical record.
During Japan’s “lost decade” (1992-2007), GDP per working-age adult grew at 1.4%/yr, which isn’t much slower than the 2.0% rate in the US (the end point of a financial bubble for the US, arguably spurred by excessively low interest rates).
Japan’s unemployment rate has been the envy of developed countries, never rising above 5.6% even during the peak of their recessions: https://tradingeconomics.com/japan/unemployment-rate
We can add to this list of partial successes that while they’ve certainly undershot their inflation target, they haven’t had a repeat of their inflation breakout in the early 70s (https://tradingeconomics.com/japan/inflation-cpi). Lost control of inflation expectations is not a pleasant disease to treat. Their GDP per working hour has simply roughly tracked the OECD average—again, half points for that: https://data.oecd.org/lprdty/gdp-per-hour-worked.htm
While they may well have done better than this with more experimental or heterodox monetary policy, central banks tend to be quite risk averse and slow to change. Historically the downsides of messing up your monetary policy have been very large, so they are inclined to accept the ‘devil they know’ rather than shoot for the ideal policy. Whether being so risk-averse is the right approach just seems unclear to me.
Furthermore, if they changed their targets, methods or processes too frequently, their forward guidance could lose credibility.
I don’t mean to say that Japanese monetary policy was correct ex post or even ex ante, just that if this was chosen as a slam dunk instance of ‘experts’ clearly messing up, it doesn’t seem so strong to me.
Excellent points.
To add to this, we should also bear in mind that GDP growth is a bad metric for comparing countries with low population growth with countries with high population growth.
For one western country with high population growth, I calculated that 20-25% of GDP is devoted just to catering for the population growth. New roads, hospitals, houses, offices, power stations, phone lines, offices, factories etc etc. So for Japan with hardly any population growth, GDP overstates the goods available for consumption versus the US, with high population growth. In effect the US has to produce a lot just to stand still.
As Japan has transitioned to low population growth, its effective ‘consumption-available’ GDP growth has been far higher than it looks.