Japan leads us into a new future, taking the next step in the great monetary experiment

Summary: A first step to understanding comes from appreciating the wonders before us. Recognition of extraordinary events that lie before us. Not unique events (those are seldom seen), but event of unusual magnitude. Old Faithful, not the usual steam kettle on the stove. Today we look at one such, one of the greatest experiments ever: sustain large-scale monetary stimulus.

In “Forbidden Planet” a great distant civilization — far away, long ago — built a planetary-scale machine to grant their every wish. It didn’t end well for them, but they deserve high marks for the boldness and scale of the project. Today economists are attempting something less ambitious, but still bold beyond any precedents.

ATLAS experiment
In the basement of the Federal Reserve


Size of central bank balance sheets for the major nations (2014 IMF estimate):

  • China: $4.8 trillion, 49% of GDP
  • Japan: $2.0 trillion, 39% of GDP
  • UK: $0.7 trillion, 25% of GDP
  • US: $4.2 trillion, 24% of GDP
  • EU: $3.0 trillion, 23% of GDP

These are mind-blowing numbers, become familiar to us in the five years since the crash.

Combined with artificially low interest rates (near-zero in all of the above but China), the major nations have sought to restore growth using extreme and unconventional monetary policy measures. The first phase — first aid to stabilize their financial systems during the crash (2008-09) were a success. The results since then, using monetary policy for extended treatment, remain unknown until the experiment concludes and monetary policy returns to normal.

As with any bold experiment, economists will learn much from the results. If successful, it will be a new world. Economic policy of the 21st century will look nothing like that of the post-WW2 era, any more than the dark nighttime cities of Victorian London resemble its brightly lite 21st century version. Future downturns — and even more so with future crashes — will be met with tsunamis of newly printed cash. Perhaps we’ve built a monetary savior, like the discovery of antibiotics.

We’ll know when the experiment is concluded. So far the results are cloudy; we’ll have to ask again later.

Japan leads the way

Haruhiko Kuroda
Haruhiko Kuroda

Japan is the cutting edge of this experiment, going boldly to where no nation has gone before. While other nations look to slow the monetary engines, they’re revving them up even more.

Bank of Japan Governor Haruhiko Kuroda said there were “no limits” to what the central bank can do if it saw the need to adjust monetary policy in the future, signaling readiness to expand stimulus further if risks threatened its price target {2% inflation}. … He also said it was “not as if there weren’t any steps left” for the BOJ to take if it were to ease again, countering views held by some market participants that having delivered a massive stimulus last year, the BOJ had no tools left to deploy.

— Interview on 13 March with Japan’s Jiji news agency, as reported by Reuters


Koichi Hamada
Koichi Hamada

The Bank of Japan can double its annual pace of bond accumulation to 100 trillion yen ($985 billion) to give fresh impetus to the economy after next month’s sales-tax increase, said an aide to Prime Minister Shinzo Abe.

“It’s not taboo for the BOJ to double the goal of bond holdings,” Koichi Hamada, 78, a retired Yale University professor who advises Abe on monetary policy, said in an interview yesterday in Tokyo. “The BOJ will be concerned about the real risk of being seen as financing debt, but drastic action is justified to pull Japan’s economy out of 15 years of stagnation.”

— Bloomberg, 14 March 2014 — about an interview on Bloomberg TV (see it here)

Japan is rapidly greying, buy they have the boldness of a youth. Perhaps that’s a winning combination in the 21st century.

What happens next?

“Unless you expect the unexpected you will never find truth, for it is hard to discover and hard to attain.”
— Heraclitus, the pre-Socratic “Weeping Philosopher” of Ionia

What comes next?  The essence of experimentation is uncertainty about the outcome. That’s a constant in human affairs. Confidence by scientists about the outcome is another constant, but often wrong.

Let’s try another perspective. Almost every major economic development of the past 15 years has astonished us. Perhaps that’s the tell, hinting of deep unseen structural changes taking place right now. Crowds are often poor at recognizing such things, oblivious to the early stages — until the realization hits us all almost simultaneously.

Stay alert. Be skeptical of confident forecasts. Tune in here for further developments.

Life and Death

For More Information

(a)  Posts about monetary stimulus:

  1. The lost history of money, an antidote to the myths
  2. A solution to our financial crisis — Among other things, large monetary action
  3. The lost history of money, an antidote to the myths
  4. Recommended: Government economic stimulus is powerful medicine. Just as heroin was once used as a powerful medicine.
  5. The easy way to understand unconventional monetary policy

(b)  Posts about our great monetary experiment:

  1. Important things to know about QE2 (forewarned is forearmed), 21 October 2010
  2. Bernanke leads us down the hole to wonderland! (more about QE2), 5 November 2010
  3. The World of Wonders: Monetary Magic applied to cure America’s economic ills, 20 February 2013
  4. The World of Wonders: Everybody Goes Nuts Together, 21 February 2013
  5. The greatest monetary experiment, ever, 20 June 2013
  6. Different answers to your questions about the momentous Fed decision to delay tapering, 20 September 2013
  7. Do you look at our economy and see a world of wonders? If not, look here for a clearer picture…, 21 September 2013
  8. Two warnings about quantitative easing, the taper, and what comes next, 27 September 2013
  9. A Fed Governor speaks honestly to us about the costs and risks of our monetary policy, 18 January 2014
  10. Wagering America on an untested monetary theory, 22 January 2014
  11. What happens if the economy hits some rocks? Will the Fed stop the taper?, 9 February 2014



16 thoughts on “Japan leads us into a new future, taking the next step in the great monetary experiment

  1. Great series of posts over the last few days, FM.

    Only thing I can add is that although the Japanese experiments are exciting, the results so far (other than the stock market) are weak, particularly considering the vast amounts of money being thrown around.

    Japan has very little reason not to gamble, if they put in too little stimulus, they are dead. If they put in too much stimulus they are dead; and the odds of getting it exactly right are slim. They are now down to the position of literally picking their financial poison.

    My best guess is that the laws of financial gravity still apply. But I also agree with FM’s comment on confident forecasts so I, for one, will continue to watch for future developments.

    We certainly do live in INTERESTING times!

    1. Pluto ,

      I agree on all points. Some context might help understand this better.

      Exports are up. Profits are up for the primo corps (I.e., those with large exposures, direct and indirect, to trade sectors). Asset prices are up.

      Benefits to Japan’s elites so far: big and bigger.

      Effects on most of its people: falling real income.

      So it’s a win, in the terms that Japan’s elites care about.

  2. Your tongue seems firmly in cheek here, FM. I thought it was settled economics that “pushing on a string” doesn’t do much to stimulate aggregate demand, absent large-scale government programs like the CCC to put people back at work…

    Obligatory link to a paper originally published in the Journal of Econometrics: “Pushing on a string: US monetary policy is less powerful during recessions,” Silvana Tenreyro, Gregory Thwaites, 12 November 2013.

    1. Thomas,

      I just report what the great and wise are doing, and the consequences of their possible success. I do not estimate their odds of success, let alone forecast the outcome. I’ll leave that for folks at higher pay grades, or with more self-confidence.

      As for the state of the economic literature, there are a great body of papers on both sides. Rest assured that the Governors of the major central banks are advancing behind a reasonable force of data and theory.

      It is an experiment.

  3. This monetary experiment is nothing new, it was used at any war time. Difference is purpose.
    At WWII time this same monetary policy was used to finance war spending, this time nobody is using this new money.
    But if government is using this new money with purpose to employ people and increase living standard with war like wigor then it would not be even noticed. We need this monetary experiment to use it in a war-economy type for employment. Government would redistribute this money into economy just as it did in times of large scale wars.

    Another thing is effect on inequality, it is marginal, low tax is what is creating inequality and monetary experiment is just slightly increasing inequality, this money is still in banks, it is not reaching the economy so the effects are marginal.

    Money from QE is not entering the economy, it piles up at banks. It is also what Krugman says Nobody Could Have Predicted, Monetary Edition March 19, 2014 NYT

    It’s actually kind of amazing. In the exchange Brad highlights, Marvin Goodfriend says, how could you expect anyone to predict that reserves would just pile up and not be lent out — nothing like that had happened since the 1930s. And Larry White then adds that it was all sterilized because the Fed paid a whopping 0.25 percent interest rate on reserves.

    Gosh. We had just had the worst financial crisis since, um, the 1930s. Why would anyone possibly think that 30s experience was relevant? I’m thinking, I’m thinking.

    And you know, that experience — and specifically the collapse of the money multiplier when you hit the zero lower bound — had been extensively discussed in this 1998 paper (pdf). The author even included a figure showing what happened:

    1. Jordan,

      “This monetary experiment is nothing new, it was used at any war time.”

      A reading FAIL, as usual. As I have said in all the posts about this — which I have pointed out to you, and you obtusely ignore — what’s different with this experiment is its scale. Magnitudes matter.

      As for the middle part of your comment, you’re wrong. But then you have demonstrated a near-total misunderstanding of these matters, and refusal to learn. So there’s no point to bother further.

      Your belief is also contradict by the many central bankers and economists who have made similar statements to mine.

    2. Please, ask others on who is failing at reading. you or me.
      It seems like you are projecting extraordinarily.

      Do you dare to ask others who is failing here?

    3. Jordan,

      Your comments consist largely of assertions, a large fraction of which are false. My replies are mostly factual, which you ignore. As we have here.

      I said: “I have said in all the posts about this what’s different with this experiment is its scale.” I never said that monetary experiments like this were unique. If you disagree, I can give quotes supporting this — if you promise to apologize and stop making stuff up. It’s a simple matter of fact. Not opinion.

    4. I really have no idea what should i apologize for.
      It is you who attacked my comment with assertions, without any indication why and why you discard my proof that QE is ineffective at anything and ineffective at inequality producing which is your assertion from post. Piling at banks is proof for my assertion that QE is inefective at anything. Level of reserves is piling up of QE. Is that what you question?
      Inequality, which is creating New America has been rising since 1970’s, blaming it on QE seems desperate.

      Your reply to me is in line with “respect my authoritay”. First insult from me to you. While you abused your authority to insult me repeatedly by rejecting my references and then claiming that i present no references. Insulting and abusive.
      You owe me apologies, multiple ones.
      Please, stop this agressive authority, don’t you see that it caused the fall in comment numbers?

    5. Jordan,

      ” really have no idea what should i apologize for.”

      Yes, that’s my point. You make up stuff, reply to things I never said, sometimes give rebuttals to the exact opposite of what I said. Sad, really.

      As I have suggested so often, reply to quotes. That might tether you to reality. You might find it enlightening.

  4. With respect, both Jordan and FM are completely incorrect here. WW II didn’t just use fiscal expansion — it gave people jobs. You may have seen films of all those men and women working in giant wartime factories manufacturing tanks, bombers, artillery shells, building ships and freighters. That is what stimulated aggregate demand during WW II — jobs, jobs, and lots more jobs. What’s more, those were high-paying jobs, not minimum wage part-time junk jobs at a fast food burger joint. (Fast food burger joints didn’t exist yet in WW II anyway.)

    The combination of fiscal stimulus plus immense employment kick-started aggregate demand because when those workers came home from their factory shifts, they had plenty of money in the bank to buy things in stores.

    By contrast, today the fiscal stimulus simply bulldozes lots of money into banks. But the money stops there. The banks don’t loan it out because most U.S. banks are insolvent and need to pay down their debts and in any case the banks have been so badly burned by liar loans during the subprime real estate bubble that their lending standards have become impossibly high. Any money that does trickle down to the consumers doesn’t get spend in stores because consumers are also in debt and desperately need to pay down their underwater home loans or their staggering college loans or their crushing 35% credit card debt.

    States are also underwater, bleeding red ink because tax revenues have collapsed. So states aren’t spending money either — any cash that comes in to a state treasury today gets plowed in reducing the state’s chronic deficit.

    So consumers and business, individual states and the federal government, are all bleeding red ink. Keynes pointed out that the solution here isn’t to reduce interest rates since we’re already at the zero lower bound and the solution also isn’t merely to dump cash from the central bank into the banks, because unless there’s aggregate demand and a healthy economy the banks quite sensibly won’t loan the money out (because they realize that consumers are under water and can’t pay back the loans they already have, much less new money loaned to them by a bank).

    Wasn’t this the point of Keynes’ oft-cited suggestion that if all else fails, the government would be best advised to bury bottles of cash in the ground and then employ people to dig them up?

    1. Thomas,

      “With respect, both Jordan and FM are completely incorrect here. WW II didn’t just use fiscal expansion — it gave people jobs. ”

      Why does nobody reply using quotes. It’s boring to reply to made up stuff. I never said anything remotely like the “US didn’t just use fiscal expansion”. That’s as daft as Jordan’s assertion that I said this monetary experiment (i.e., expansion of the Fed’s balance sheet) is something new.

      The Fed did monetize debt during WWII, as one of the many fiscal and monetary tools used by the government. This is nothing new. The WW2 monetization was big, but not as large as the Fed’s balance sheet expansion since the crash — in terms of either dollars (now $800 billion to $3.8 trilion) or percent increase (now almost 5x).

      Why is this so difficult to understand? It’s very basic history.


      FRED: WW2 monetization

  5. I will be flabbergasted if Japan’s I’ve-drunk-the-kool-aide Keynesian experiment works. Think of a household or any other entity that goes too deep in debt. It can buy time by rolling the debt over (if its credit is still good), but, sooner or later, it must divert income from consumption and investment to debt repayment, forcing household members to reduce their standard of living. When a country as a whole must reduce consumption and investment to increase debt repayment (and private savings, without which long term economic growth eventually will stall due to insufficient funds for investment), GDP must either contract or slow to a crawl. I have tried to look at the Keynesian bag of tricks from escaping this cold mathematical equation from every angle, yet I can see nothing but techniques for postponing the inevitable.

    A household might wiggle out of its predicament by bringing in more income, and Keynesianism aims to replicate this by boosting GDP growth, but a cutting edge economy that is not playing economic catch-up just cannot grow unusually fast for very long. Thus, for the past 200 years, real *per capita* GDP growth has averaged only 2% per year. (Of course, population growth boosts total GDP growth above the per capita level, but it does not enhance the purchasing power of the average household.) It is not realistic to think a developed country like Japan or the US can manipulate the per capita production of useful goods and services beyond the long run average for very long by means of monetary and fiscal shell games.

    Let us take money printing. The Treasury could mail million dollar checks to every household in America. Short term, it would eliminate private debt, eliminate poverty and welfare dependence, and send consumer spending and business profits through the roof. But, a little down the road, there would be hell to pay. Monetary and fiscal shell games are nothing but the naive search for a free lunch, the economics equivalent trying to invent a perpetual motion machine, and QE on any scale (formerly known as monetary inflation, as distinct from, but related to, price inflation) is just an opaque or “back door” method of financial redistribution with delayed after effects. A more honest, transparent, and less economically distorting means to the same end would be to hike taxes and to transfer the increased tax revenue to the politicians’ favorite debtors. Done directly, everyone would see this strategem for what it really is–not a miracle, but a sleight of hand trick. Even the lawyers we elect to run Congress would understand it then.

    WW2 was only an apparent exception. Government debt went up, but private debt was reduced more than enough to offset it, and it is private debt that is the bigger drag on the economy, although this is not to minimize the problem of excessive public debt either. People went back to work, mostly at low-paying jobs, making bombs and bullets and other things that did not raise the public’s overall standard of living. It was “workfare” on a massive scale. Wage and price controls were used to contain inflation, while consequent shortages were “avoided” by strict rationing, which forced workers to channel more of their discretionary income into debt repayment and increased private savings, which, in turn, laid the foundation for an economic takeoff after the war. At the same time, America’s age demographics, which had been unfavorable during the 1930’s, began to change in ways that favored economic growth about the time we entered WW2. Meanwhile, we, with some help from the other side, destroyed the productive economic base of our potential trade rivals, which gave us a quarter century of consistent trade surpluses that boosted our GDP. Uncle Sam dealt with the post-war public debt burden by slashing federal spending and federal employment, and by “financial repression,” ie, keeping interest on new government debt below the rate of inflation. But investors had few better options for investing their money because the rest of the world was either a shambles, falling under Communism, or a pre-industrial backwater. Also, the technology of the period was much less conducive to easy capital mobility than today. We also had lots of cheap energy because we were the “Saudi Arabia” of the age, and the Texas Railroad Commission effectively determined the world price of crude oil. That is the real story of America’s WW2 “Keynesian miracle,” and it cannot easily be repeated.

    1. John,

      While you make many sound points, your analysis rests on a severe category error: macroeconomic analysis of a national economy or government is not like a household.

      For example, see the paradox of thrift (best known from Keynes, but goes back to early 18thC).

      Also, I wonder if Keynesian accurately describes Japan’s economic policy since 1989. Perhaps it does describe Abenomics, but I’d like to an economist familar with Keynes rule on that.

  6. Dear editor,

    You wrote: macroeconomic analysis of a national economy or government is not like a household.(end quote)

    That is the classic Keynesian response to neoclassical critiques along the lines of “We can’t spend ourselves rich,” but it is just an alibi necessary to prevent Keynesianism from sounding silly. When I want to know *why* a national economy is not analogous to a household economy, the differences provided are either irrelevant or trivial. The true but unarticulated reason is that the Keynesian “pump priming” theory of economic resuscitation does not make sense when a national economy is analyzed like any other economic institution. Instead of a Newtonian presumption that the physics of earthly experience also apply to the celestial bodies, Keynesians like to imagine that, expanded to the national level, economics becomes more like subatomic physics where a whole different set of rules apply, and (some version of) their favored theory becomes the equivalent of quantum mechanics.

    But exactly where does the household analogy breakdown, logically speaking? It doesn’t.

    I don’t deny that there are some shortcomings in neoclassical theory, and I appreciate that Keynes made some valuable contributions in analyzing the economy in terms of aggregated behaviors, but I have yet to see anyone demonstrate that these aggregated behaviors do not have analogues at the household level. The historical origin of the “not like a household” dogma is that there is otherwise no defense to the “can’t spend ourselves rich” critique.

    Bottom line is this: are prolonged recessions/depressions due to deep-rooted psychological fears that people will overcome once government boldly steps in and substitutes government demand for private demand, creating a large (or so Keynes predicted) multiplier effect throughout the economy (In which case the household analogy really would be inadequate)?

    Or are these prolonged downturns “balance sheet recessions,” from which economies only permanently recover when they have reduced the aggregate level of debt and increased their savings (IOW, cleaned up their balance sheets), the model presupposed in the book _This Time Is Different_ (in which case the household analogy is perfectly viable?

    (As an aside, I owe the term “balance sheet recession” to post-Keynesian economist Richard Koo, who accurately diagnosed Japan’s ailment, but erroneously advocated QE as the cure. In 2002 he thought it was working, but now he concedes that QE has only short term benefits, just as the neoclassicals had always warned. I say, if overburdened balance sheets are the problem, then the solution is obvious: clean up the dadgum balance sheets!)

    Returning to my main line of thought, I argue the latter, because it makes sense. The former is inadequate in the laboratory of experience (except during “routine” recessions which quickly bottom out before the effects of “stimulus” policies have time to kick in). For example, Obama’s deficit spending was much more than enough to soak up 100% of estimated uninvested US savings, yet consumer spending did not return to the pre-recession level, and attempts to measure the multiplier effect suggested it was abysmally low, perhaps less than one. Keynesian theory says that much deficit spending, even if all they did was hire people to dig holes and fill them in again (I’m not making this up, I swear! This very example is used in the enthusiastic little biography, _The Age of Keynes_), it should have been sufficient to have the US economy firing on all cylinders long before now.

    Rogoff is right: bite the bullet, pay down our debt and increase our savings, and we will recover without the need for Keynesian remedies of only short effect, just like many other countries before us that have found themselves in similar circumstances. Ditto, Japan, provided their extreme demographics don’t hold them down. Just like a household, and not like sub-atomic physics. It is logical, and it is proven by experience. For examples, I refer you again to Rogoff’s and Reinhart’s splendid historical survey.

    Meanwhile, look at China. Like Japan, they too had consulted with Richard Koo, who swears the Beijing leadership is the smartest ruling elite he has met anywhere in the world, and I have no reason to doubt him. But they used Keynesian policies to breeze through the Great Recession even though demand from their main export markets was falling off a cliff. It looked like a rip-roarin’ Keynesian success story, but now they are faced with the largest real estate bubble in world history. Maybe the Chi-Com leadership is so smart it can engineer a soft landing–maybe–but if I were them, I would not be sleeping well at night.

    Once again, there’s no free lunch.

  7. Dear editor,

    Oops! Left a couple of your points unaddressed. Briefly:

    paradox of thrift: Keynes feared that some of the economy’s savings would go uninvested, reducing aggregate consumption. I am sure this happens to some extent. It is similar to a household whose consumption falls when it increases its savings. The main difference is that at the national level, if savings are fully invested, then some people in the economy are benefitting from it immediately, but I don’t think that difference discredits the analogy as a way to understand the paradox of thrift.

    Yet whether the paradox of thrift actually has a non-trivial effect in the aggregate economy–except perhaps during rare balance sheet recessions–is questionable.

    For a very skeptical take on the thrift paradox, see:


    which points out the paradox of thrift was entirely dropped from the 14th edition of Neo-Keynesian Paul Samuelson’s famous textbook. (Samuelson is the “father” of the Neo-Keynesian hybrid (part Keynesian, part Neo-classical) that dominates mainstream economic thought, at least in the Anglosphere.)

    And, yes, Japan has pursued Keynesian policies since early in its post-1990 recession, although not always as aggressively as some Keynesians would like. It always seems to be like that, you know–no matter what you do in terms of deficit spending, artificially low interest rates, and money printing, if it doesn’t work, then some Keynesian swears that you just didn’t do enough of it. It’s *never* enough. Was it Einstein who said that is the definition of insanity? When something is not working, just do more of it?

    But I should note that Keynes himself warned against QE as a remedy. Stick with deficit spending, he said, because he feared inflation all his life. But eventually even the New Dealers’ deificit spending became too much for him. What would he say if he could see what the entire world’s leaders are doing today? And with so little to show for it? Would he still be a Keynesian? It was a beautiful theory. It just doesn’t work.

    But Abe is doubling down in desperation, and the bond market vultures are beginning to circle. Some of them have been waiting 20 years for this day to arrive–I exaggerate not; I was warned by a very savvy internet contact about the inevitable Japanese bond default in 1998, and I could not believe it then, yet here we are, and now they can smell the carcass.

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