PIMCO Discusses The Failed Keynesian Japanese Anti-Deflation Experiment; Implications For The U.S.
Paul McCulley discusses the failed Japanese inflation experiment, and the ongoing 3rd decade of deflation, which has destroyed over 70% of the Nikkei's value. The reason proposed by the Pimco Managing Director for this 30-year ongoing weakness: an inability to fight the "liquidity trap" with sufficiently forceful measures. Yet an implication of Pimco's perspective is that despite posturing for an end to QE in March right here in our very own United States, this will likely not happen, or even if it does, QE will promptly return soon thereafter.
To its credit, the BoJ did adopt a commitment approach when it adopted Quantitative Easing (QE) in 2001, explicitly committing to a continuation of that regime until year-on-year change in the core CPI became positive in a “stable” manner. But when for a few months it appeared that “success” had been achieved in 2006, the BoJ exited QE. Whether or not it was a matter of a genuine policy mistake, made with the best intentions, or a policy mistake borne of a lack of will to be enduringly unorthodox is an open question.
But the fact of the matter is that Japan slipped back into deflation soon thereafter. The missing ingredient was a commitment to not only resist pulling back from QE and avoiding rate hikes until inflation turned positive but to continue that policy even after inflation started moving up. And in terms of credibility, the cost has been high: Unless and until the BoJ commits credibly, backed by money-printing actions, to behaving “irresponsibly relative to orthodox, conventional thinking,” Japan will remain stuck in a liquidity trap.
And in addition to a neverending quantitative easing regime, Pimco thinks the following measure are applicable.
- Explicitly promise there will be no exit from QE and no rate hikes until inflation is not just positive, but meaningfully positive. One way to do this would be to adopt a price level target rather than an inflation target, embracing the idea that past deflationary sins will not only not
be forgiven but require even more aggressive reflationary atonement.
- Buy unlimited amounts of the long-dated Japanese Government Bonds (JGBs) to pull down nominal yields, with an accord with the fiscal authority to absorb any future losses on JGBs, once reflationary policy has borne its fruits, generating a bear market in JGBs.
- Working with the Ministry of Finance, sell unlimited amounts of Yen against other developed countries’ currencies, printing the necessary Yen.
Again, nobody really cares about Japan - the question is whether these are relevant for the US, and whether the proposed monetization and currency race to the bottom are applicable to that much bigger anti-deflationist Keynesian experiment: the US.
But as Mr. Bernanke intoned, no country with a fiat currency, which borrows in its own currency in the context of a current account deficit, should ever willingly embrace deflation.
So yes, look for endless QE, ever-increasing monetization and a much more worthless dollar in the US future very soon.