Lessons from Japan
Marcus Nunes posted some graphs on Japan a while back, but he missed out my two favourite graphs.
First, the graph showing the Bank of Japan’s fairly successful CPI level targeting regime. The level target they seem to follow is to keep the CPI at around the level of 1993/1994; allowing only temporary upward deviations due to supply-side shocks. But certainly none of the “base drift” you see from central banks targeting an inflation rate.
You can see the 2% hike in the VAT rate in 1997, but the BoJ had deflated back down to the old price level by 2002. The commodity price spike in 2008 shows up, but never fear: the BoJ were on hand to heroically lower the CPI level, right down to 1993 levels by 2011. Jean-Claude Trichet, eat your heart out.
Marcus’ commenters did not appreciate my sarcasm on this topic. But if you listen to (most) Keynesian macroeconomists talking about the UK right now, and apply their advice to Japan, should we not conclude that what Japan needs is some more deficit spending? They’re stuck at the ZLB, so monetary policy “obviously doesn’t work”, and deficit spending is “obviously expansionary”.
That’s not what Keynesian macroeconomists were saying about Japan a decade ago, of course, but let’s pretend Krugman/Bernanke/Svensson never existed.
The second graph Marcus missed was government net debt/GDP:
Just a teeny bit more deficit spending. That’s all we need. Right?