June 2023 Monthly: (Only through Google traslation)
The Bank of Japan that does not fight inflation is the DNA of the Faculty of Economics at the University of Tokyo
June 21, 2023
"Is the recovery of Japanese stocks to the 33,000 yen level for the first time in 33 years a bubble?" Ask Bing, a generation AI?
“The recovery of the Nikkei Stock Average to the 33,000 yen level is certainly notable news.
Bank of Japan Governor Ueda has said that the recent rise in stock prices is due to the recovery of Japanese companies' business performance and improvements in corporate governance, and that the Bank of Japan's monetary easing policy is not the direct cause.
On the other hand, some market players and analysts believe that the Nikkei Stock Average is overvalued. For example, the PER (price earnings ratio) of the Nikkei Stock Average is about 18 times, which is higher than the US Dow Jones Industrial Average and the S&P 500 Index. This shows that expectations for Japanese stocks are rising, but at the same time there is a risk of excessive price appreciation.
Buying by overseas investors has also contributed greatly to the rise in the Nikkei Stock Average. Foreign investors are paying close attention to the earning power of Japanese companies and the expansion of shareholder returns, but there is a possibility that they will turn to selling due to global interest rate rises and inflation concerns. In that case, the Nikkei Stock Average may fall sharply.
As described above, the recovery of the Nikkei 225 to the 33,000 yen level indicates the recovery of the Japanese economy and improvement in corporate activity, but it also includes the risk of a bubble and market fluctuations. prize. ”
There is no doubt that the same answer by Bing, a generative AI, will reach a passing mark in the final exam for the economics department of the University of Tokyo, the alma mater of Bank of Japan Governor Ueda.
However, I have been arguing in April and May monthly that the current Japanese stock, real estate and foreign exchange markets are nothing but an asset bubble mainly originating from the Bank of Japan, regardless of whether the former Governor Kuroda or the current Governor Ueda. As you know. In this June monthly report, let's delve deeper into the essence of the asset bubble originating from the Bank of Japan.
Poor people suffer from inflation
By the way, the ones who suffer from high inflation exceeding the 2% price stability target of the Bank of Japan are none other than creditors and depositors who expect price stability to continue. Even if the nominal amount you are lending or depositing is the same, the inflation-adjusted real loan amount or deposit amount will unexpectedly decrease.
In addition, when the price of goods and services rises more than expected due to high prices, when trying to maintain the level of consumption up to that point, there is no choice but to increase nominal consumption expenditure. Low-income consumers, who find it difficult to purchase goods and services in the usual way due to unexpectedly large declines in real disposable income and consumption levels, will be hit hard by high inflation above the 2% target. will receive
In other words, even if the value of the currency falls sharply due to unexpected inflation, and on the contrary, prices become unexpectedly expensive, it is difficult to refrain from purchasing daily necessities such as clothing, food and shelter. In this way, the cost of living crisis is spreading from spring 2021 in Europe and spring 2022 in Japan.
In the worst case, violent demonstrations by the impoverished masses may occur frequently, and even social unrest may occur. In the past, there were uprisings and rice riots in our country as well. The story of the "carryer" under the postwar inflation frenzy will be described later in "The Novel Bank of Japan".
Government and Ministry of Finance
Conversely, a typical example would be a company whose debts are substantially lighter than expected, as they are plagued by high prices and high inflation. However, not only companies but also the Japanese government and the Ministry of Finance, which have been able to "enjoy" the double benefits of increased sales due to the high consumption tax rate of 10% and the inflation tax, to a greater extent than expected, are also in the "Uhauha group" of inflation. would have to include.
In other words, the more borrowers can borrow, the more effectively the debt burden will be reduced by inflation. It goes without saying that the biggest debtor in our country is none other than the Japanese government.
In addition, it is not necessarily certain whether or not foreign investors are overwhelmed by inflation. This is because the exchange rate is involved.
For example, in the case of Americans and American companies, even if they obtain capital gains in the form of rises in Japanese stock prices and real estate prices due to inflation, the depreciation on a dollar-denominated basis of the yen's depreciation/strength can be used as yen-based profits. must be deducted from
Inner talk of the Faculty of Economics, the University of Tokyo (this section has extensively used Bing, a generative AI)
Now, let me introduce the serious monetary policy battle between Governor Ueda of the Bank of Japan and Professor Kiyotaki. The so-called “Internal Geba Incident” of the Faculty of Economics at the University of Tokyo is the title of an article serialized in April 2023 by the Nihon Keizai Shimbun. In the same article, it was introduced that Professor Kiyotaki of the University of Tokyo expressed a critical view of the large-scale monetary easing measures led by Governor Ueda, and that the two sides developed a controversy.
Although Professor Kiyotaki graduated from the Faculty of Economics at the University of Tokyo, he has been known as a professor at the Faculty of Economics at Princeton University.
In any case, according to the same article, Professor Kiyotaki pointed out that monetary easing measures are pushing up stock and real estate prices excessively, forming a bubble and distorting market functions. He also pointed out that monetary easing measures are not leading to price increases and economic growth, and that there is no prospect of normalization of monetary policy. Professor Kiyotaki proposed a gradual reduction of monetary easing measures, raising long-term interest rates, and stimulating demand through fiscal policy and structural reforms.
On the other hand, Governor Ueda argued that the monetary easing measures have expanded the supply of funds, boosted the asset values of businesses and households, and stimulated the willingness to spend. He also stressed that monetary easing measures have prevented economic turmoil from the coronavirus outbreak and laid the foundation for economic recovery. Governor Ueda said he was also aware of the side effects of monetary easing and would take action if necessary. However, he insisted on postponing monetary policy normalization until the price stability target of 2% is achieved.
In this way, Governor Ueda and Professor Kiyotaki deepened their discussions on important themes related to the future of the Japanese economy from different perspectives. The government expressed its willingness to listen to Professor Kiyotaki's recommendations, but he also indicated that he would cooperate with Governor Ueda to ensure the stability of monetary policy.
There are advantages and disadvantages to both the claims of President Ueda and Professor Kiyotaki. Governor Ueda's argument emphasizes the positive effects of monetary easing on the economy, but I feel that it does not sufficiently explain the side effects and the difficulty of normalization.
On the other hand, Professor Kiyotaki's argument points out the problems of monetary easing measures. will need to be considered carefully. There is no single correct answer for monetary policy, and I think it is important (Bing's AI) to respond flexibly to economic conditions and market trends.
Who will win the battle between the Faculty of Economics at the University of Tokyo and the Faculty of Economics at Hitotsubashi University?
It is a well-known fact that Governor Ueda of the Bank of Japan has a career as Dean of the Faculty of Economics at the University of Tokyo. When I was the head of investment research at Reuters Japan (2008), I traveled to the Hongo campus with the head of the human resources department at Reuters Japan and visited Mr. Ueda, who was the head of the Faculty of Economics at the University of Tokyo, with the aim of recruiting students from the Faculty of Economics. (In addition, at the same time, I went to Recruit at Hitotsubashi University's Faculty of Economics together with the head of the Human Resources Department.)
At that time, I still vividly remember hearing the candid opinion of then Dean Ueda, who said that the Faculty of Economics at the University of Tokyo was not particularly outstanding in terms of finance.
By the way, the Faculty of Economics at Hitotsubashi University, where I was enrolled in the 1970s, was called one of the mecca of modern economics in Japan. In contrast, it was said that Marxian economics was still the mainstream in the Faculty of Economics at the University of Tokyo at the time.
In any case, recently, NHK and TV Tokyo have been actively promoting Professor Tsutomu Watanabe of the Faculty of Economics at the University of Tokyo as a leading figure in Japan's prices. Regrettably, I cannot help but feel quite uncomfortable with the views of economists who graduated from the Faculty of Economics at the University of Tokyo.
For example, Professor Kiyotaki, who I mentioned earlier, is probably an exception, but basically they do not correctly understand that one of the biggest challenges facing the Japanese economy is not only high inflation but also long-term economic stagnation. Is it not?
Assuming long-term economic stagnation and recent acceleration in inflation, we should hurry to normalize monetary policy like Professor Kiyotaki. A policy mix of monetary and fiscal policies, i.e., a permanent, not temporary, reduction of the consumption tax rate to 5%, will be essential for the revival of Japan ("Scenario for Japan's Revival" ( Cosmic Publishing), etc.).
In fact, according to the Cabinet Office, the GDP gap, where aggregate demand falls below aggregate supply, remains at about minus 1%, and it is nearly impossible to eliminate this gap by continuing unconventional monetary easing. The poor performance record of the Bank of Japan over the past decade or so already proves it.
If the BOJ's monetary policy is to be reexamined over the next year or two, the new governor of the BOJ, Ueda, could be ridiculed as nothing more than an ivory tower scholar who is too good at postponing problems.
A permanent fiscal expansion is needed, and the most desirable way to achieve this is a permanent reduction of the consumption tax rate to 5%, which also stimulates the willingness to work. However, economists who graduated from the Faculty of Economics at the University of Tokyo, including Professor Kiyotaki, have been silent on a permanent and drastic reduction in the consumption tax rate toward the abolition of the consumption tax.
Regarding the Japanese economy, which has already fallen into the "liquidity trap" that Keynes predicted nearly 100 years ago and has lost 30 years, it is with great regret that "economists" who graduated from the Faculty of Economics of the University of Tokyo In a sense, it can be said that the fact that we have not been able to formulate a prescription for revival for the past 30 years is unreasonable. It may be a matter of submitting a medical certificate of the past Japanese economy. Moreover, I cannot help but criticize him severely, saying that it is doubtful that he has reached a passing grade outside of the University of Tokyo, based on a medical certificate that disregards the history of the intermittent consumption tax hike.
In any case, in macroeconomics there is no "absolutely correct policy or way of thinking that no one can deny".
Macroeconomics is all about It depends!
Inflation or deflation in terms of prices?
The answer from macroeconomics depends on whether the real economy is booming (aggregate demand > aggregate supply and the GDP gap is +) or recession (aggregate demand < aggregate supply) and the GDP gap is -).
This is the basis of modern economics. Unfortunately, perhaps the Faculty of Economics at the University of Tokyo still carries on the tradition of classical Marxian economics based on dogmatism and the labor theory of value.
Unfortunately, it may be that they still have difficulty understanding the basics of macroeconomics based on the neoclassical tradition of modern economics after the Marginal Revolution, genetically.
Saburo Shiroyama's "Novel Bank of Japan", which depicts the post-war frenzy of money inflation, is now vividly revived
By the way, Mr. Saburo Shiroyama's "Novel Bank of Japan" is now being revived vividly. Let me explain in a little more detail below.
The period of chaos immediately after the end of the war, the era of revenge inflation when frenzy inflation rages.
The main character, Tsugami, who left the University of Tokyo to join the Bank of Japan, was trying to pursue the true meaning of man's happiness.
Article 1 of the former Bank of Japan Act, which lasted until 1998 after the war, states, ``The Bank of Japan shall, in line with national policies, regulate the currency, adjust the financial system, and maintain the credit system in order to appropriately demonstrate the national economic power. The purpose is to leave it to the upbringing.”
Article 2 states, ``The Bank of Japan should be operated solely with the mission of achieving national objectives,'' said Hasegawa, a senior Tsugami senior. I decided.
But Tsugami answered.
"It was a law that imitated the Reichsbank in Germany. But even the Reichsbank, the central bank of a totalitarian state, fought hard against the expansion of the currency. As a result, Hitler became furious and arrested Schacht for treason, stating, "I will not allow the existence of the island Reichsbank in the waters of the Third Reich." I was sentenced to death. He was eventually sentenced to seven years in prison.
If we had a steadfast governor of the Bank of Japan before and after the war, we would have been able to avoid such a miserable inflation.”
A study session in the bank, "Drop Club". A prize essay sponsored by a certain newspaper company. Tsugami continues to work hard. The German Reichsbank, which resisted Hitler, was his ideal.
"The central bank does not exist to defend the interests of industry associations, nor does it exist to defend the interests of workers or agriculture or some more important group."
Central banks are for the whole nation, writes Focke, who was the youngest member of the Reichsbank board.
Tsugami had a strong sense of self-confidence on par with Focke.
But I'm not arrogant. When his arrogance comes to the fore, he reprimands himself as a teacher to his seniors and colleagues.
"I like the work I do. I feel that my work is worth it. This is the first. Secondly, I like the woman I want to be my lifelong companion. Women are the right sex for me. This is the second. If so, all the treasures in life are the same as what you get."
In Tsugami, the words of a fortune teller in Shinjuku remain in my ears forever.
His father, a professor at a national university, has passed away, and he learned wisely for the sake of his poor mother and sisters living in his hometown. He wanted to fulfill the mandate of the central bank.
Even when an offer of marriage with Kiyoko Toenji, who was a descendant of the court nobles, was brought up, Tsugami was rather rebellious. It's because the people around him who are working hard to create a family clique look lowly, but eventually he comes to love Kiyoko as a woman...
However, contrary to his lofty aspirations, the reality surrounding Tsugami was that he was in extreme poverty due to inflation.
"Elite group, even in the bank of Japan, Tsugami, a secretary who is on a career course, puts his father's legacy into a fixed deposit while being called an idiot in the midst of inflation. Severe inflation plunges the family into the depths of poverty...
Tsugami, a ``righteous'' who thinks seriously about monetary policy while watching the downfall of his seniors in the vain of the Bank of Japan man who only thinks about self-protection and career advancement, dared to apply for the essay contest. I chose the difficult path. ”
I want to stabilize the currency and prices somehow. A man who burns with his ideals and is troubled and hurt because of it.
In the end, a fortress called the Bank of Japan cornered him.
Courage to be despised, but guilt will last for a while. Just because they are progeny of a big game, they believe themselves to be the winners in life, and in fact, they are promised the position of winners in a calm and lethargic world...
However, such a group is by no means an elite. It doesn't matter where you come from, what your educational background is, or where you work.
Even for the sake of his own ambitions, his pride as a human being and his spirit of not betraying his own rules are truly worthy of respect.
In terms of inflation and deflation, until 2021, the historical background depicted in "The Bank of Japan" and the present day were completely opposite.
Nevertheless, how similar the minds of the people who live there are!
Unexpectedly, in Japan as well, the high inflation of the Reiwa era, which is not the post-war "money return inflation," is clearly re-emerging, and the "novel Bank of Japan" is now vividly revived like a phoenix.
It would not be an exaggeration to say that Mr. Saburo Shiroyama's "Novel Bank of Japan" is a classic of economic novels not only in Japan but also in the world. Honestly, I can't say anything but spectacular. I highly recommend taking this opportunity to read it.
The Bank of Japan's Ideals Inevitably Rekindle Inflation
Why should the pursuit of the BOJ's ideals be at the heart of the June 19 Nihon Keizai Shimbun editorial?
Like Mr. Tsugami, the Bank of Japan must be the guardian of prices and currency for the sake of the people.
Also, shouldn't the Bank of Japan have to focus on contributing to the sound development of the national economy for the sake of the people?
Last fiscal year, core inflation was 3%, and this fiscal year, on a national core-core basis, the underlying trend has already been recorded to be 4.1% year-on-year.
With the current depreciation of the yen, it is clear that the fire of accelerating inflation in Japan is burning before our very eyes.
Rather than asking the Bank of Japan to be the watchdog for prices and currency, the company's theory seems to want it to be the government's watchdog.
In any case, it must be said that there is very little basis for hopeful observations that inflation will fall below 2% in the second half of this fiscal year, as claimed by the Bank of Japan.
First, because the BOJ's inflation forecast has been so grossly wrong in the past, there is 3% core inflation in FY2010, and in addition, the BOJ's price stability target of 2%, which is currently around 4%. , has allowed inflation to overshoot twice that amount.
Second, there is the Adaptive Hypothesis of Inflationary Expectations, which the BOJ Kuroda has been particularly good at, which states that past inflation is likely to lead to future inflation, like the law of inertia. According to this hypothesis, it is reasonable to assume that the past acceleration of inflation will continue to push up the price level in the future as it has in the past, at least for the time being.
Third, inflation expectations should not be asked to the companies that actually set prices and to the consumers who have no choice but to accept them, rather than to the government bond market, which has lost market function due to excessive control by the BOJ. Is not it.
According to the BOJ Tankan and consumer surveys published by the Bank of Japan itself, inflation expectations have clearly indicated an acceleration of inflation, not a recession, one year from now. In particular, consumers expect inflation to exceed 5% in the next year.
Why is Governor Ueda so insistent that inflation will slow in the second half of the fiscal year, even if he ignores the BOJ's own survey of inflation expectations by businesses and consumers a year from now? Where is his objective basis?
Finally, perhaps reflecting the expectation that the FRB will not raise interest rates for the time being, it seems that crude oil and international commodity prices have begun to rebound from their downward trend so far last week.
Inflation in Japan was certainly triggered by import inflation at first, but recently domestic inflation has become more dominant than import inflation due to the trend of falling natural resources and international commodities.
However, if resource and international commodity prices return to an upward trend and the yen depreciates further, there is no denying the fear that Japan's current acceleration of inflation will be amplified further in the future.
Prime Minister's dissolution postponement Danger of playing with power
First of all, it is thought that there were the following factors behind Prime Minister Kishida's announcement of the postponement of dissolution.
- It was reported that the Constitutional Democratic Party of Japan will submit a no-confidence motion against the Cabinet. In response, Prime Minister Kishida said, "It is the government's mission to find answers to issues that cannot be postponed," and indicated that the no-confidence motion would be immediately rejected.
- Cabinet approval ratings were on a downward trend. It has been pointed out that the year-end party at the eldest son's official residence, troubles with my number cards, and relationships with women close to him may have had an effect.
- It seems that Komeito's decision not to endorse LDP candidates in the Tokyo metropolitan assembly election and the discord within the ruling party are said to be the factors that missed the timing of the dissolution.
Based on these factors, it is speculated that Prime Minister Kishida decided that the dissolution of the Diet during the current Diet session would not be advantageous.
Next, regarding the criticism and evaluation of this judgment, there seems to be the following views.
- A critical view: Prime Minister Kishida put his own and his LDP's interests ahead and missed an opportunity to question the faith of his people. The right of dissolution was used as a tool for political bargaining, not as a responsibility to the people. There is a risk of causing political vacuum and confusion.
- Positive view: Prime Minister Kishida showed his willingness to tackle important policy issues such as the international situation, decarbonization, and countermeasures against the declining birthrate. The right of dissolution was used not as a means of reflecting the will of the people, but as a means of ensuring political stability and efficiency. He displayed political leadership and rationality.
I think it's important to think about Bing's AI from both sides like this. I can understand the criticism that Prime Minister Kishida's postponement of the dissolution is a danger of playing with power, but on the other hand, we cannot deny the positive view that political judgment and situational judgment are necessary. Ultimately, it will be up to the public to vote.
In any case, the future focus will be whether there will be a breakup after the fall. The prime minister, who is aiming for re-election in the Liberal Democratic Party presidential election in September 2024, should not make decisions based on his own convenience. If you lack a cause, the people will see through it.
Conversely, there is no doubt that the "hearts" of the general public in Japan will be put to the test in the future.
Let's make the dream of the Reiwa Restoration come true
It is imperative that we aim to break out of the long-term economic stagnation by curtailing wasteful expenditures that are spread out based on our interests, and by implementing a permanent and significant reduction in consumption tax.
On the contrary, it simply wastes limited economic resources and time on measures such as "different dimension" military expansion and declining birthrate.
At the same time, in order to deal with the sharp decline in real disposable income caused by rising inflation and inflation taxes, there is no other way but to quietly pursue normalization from the unconventional monetary easing policy.
In a climate of high inflation, sooner or later it is inevitable that interest rates will rise. The pain from the continuation of monetary easing in a different dimension is inevitable, and it will never be small.
Although it will not be easy, we must resolve that there is no other way to avoid the unprecedented post-war crisis of prolonged stagnation under high inflation other than a policy mix of permanent consumption tax cuts and monetary policy normalization.
All other irrelevant economic policies are foolish and time consuming aggravate the crisis.
The road to Japan's revival is extremely narrow and tough, but let's believe that the road is still open.
Japan's biggest bottleneck (obstacle) is none other than the exploitative political and economic system of the "senior citizens" who are hereditary and privileged.
It is a mistake to think that Japan's entire future depends on whether ordinary people can choose the right path based on democratic, inclusive and market capitalism instead of "senior citizens" from that wrong path. is not.
A policy mix of permanent consumption tax cuts and normalization from unfamiliar monetary easing will undoubtedly be the first step toward the revival of Japan as Japan faces its greatest crisis since the end of World War II.
In a sense, this is nothing less than aiming for Japan's first non-violent "Reiwa Restoration" based on new ideas.
Tomo Nakamaru
Former World Bank Economist
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