This Week's Weekly: What is common to the
Bakumatsu hyperinflation, the post-war revival of money inflation, and the
rapid inflation of Reiwa is the idea of reverence for the emperor and the
expulsion of foreigners! ?
September
4, 2023
Inflation
controversy causes recurrence of gibberish incident at the University of Tokyo
(Nakamaru) Last week, Professor Tsutomu Watanabe of
the Faculty of Economics at the University of Tokyo, who is said to be Japan's
foremost authority on prices, criticized Bank of Japan Governor Ueda's remarks
on price forecasts at the Fed's annual summer seminar held in Jackson Hole.
Please explain what it is and its significance.
Professor Watanabe's
assertion, albeit a pretentious one, supports the concerns of rising inflation
in Japan that I have been stating for a long time.
(Bing) Tsutomu
Watanabe, a professor at the University of Tokyo, has questioned the BOJ's
price outlook, saying that it is kept below the actual level so as not to
invite speculation about the normalization of monetary policy. "We believe
underlying inflation is still slightly below the 2% target," Bank of Japan
Governor Ueda told a panel discussion at the Fed's annual summer seminar in
Jackson Hole. "That's why the Bank of Japan is sticking to the current
monetary easing framework," he said. In response to this statement,
Professor Watanabe said, "I think that's wrong," and his own forecast
is that the rate will exceed 2% at 2.7-2.9% in FY2023 and 2.1-2.2% in FY2012
and FY2013. I predicted it would.
The significance of Professor Watanabe's
criticism lies in the fact that the BOJ's underestimation of the outlook for
prices could restrain moves to raise wages and interest rates. Since the price
outlook will also serve as the basis for wage negotiations in the spring labor
offensive, he pointed out that if the outlook for fiscal 2011 "does not
rise at all, it will have the effect of making the level of wage increases set
for the spring labor offensive in 2024 moderate." He also argued that the
Bank of Japan should not just talk about ending deflation in words, but also
show it in numbers, while being conscious of the magnitude of its influence.
Professor Watanabe said that if the Bank of Japan adjusts short-term interest
rates by achieving its price target, ``the pressure on the yen to depreciate
will change in terms of the interest rate differential, so the yen depreciation
will stop,'' and the government should not intervene in foreign exchange. I
showed my thoughts.
Professor Watanabe's criticism can be said
to encourage the Bank of Japan to strengthen its commitment to price targets
and advance preparations for normalizing monetary policy. If the Bank of Japan
were to revise its price outlook to reflect actual conditions, expectations for
wage and interest rate hikes would increase, potentially creating a virtuous
cycle of rising prices and wages. Furthermore, if the Bank of Japan decides to
normalize monetary policy, it will also indicate that the Japanese economy has
broken out of deflation. Professor Watanabe's criticism concerns trends in
prices, wages, and exchange rates, which are important issues for the Japanese
economy, and can be said to have great significance.
Shift
from deflationary gap to inflationary gap
(Nakamaru) In fact, last week, the Cabinet Office
announced that based on high GDP growth for the April-June period of 2023,
Japan's economy had turned to an inflation gap where aggregate demand exceeded
aggregate supply by about 0.4%. It was as expected in my August monthly
forecast, but please explain the significance.
(Bing)
The fact that Japan's economy has turned into an inflation gap means that
aggregate demand exceeds aggregate supply and the economy is close to full
employment. This can be considered positive news in the sense that it may lead
to an end to long-term deflation and an increase in wages and prices. The
inflation gap is also an indicator that the economy is overheating, so the Bank
of Japan and the government need to pay attention to trends in the inflation
rate and interest rates and implement appropriate monetary and fiscal policies.
The calculation method and detailed data for the inflation gap can be found on
the Cabinet Office website.
"The Novel
Bank of Japan" and the Great Inflation After the War
(Nakamaru) By the way, in Saburo Shiroyama's
masterpiece ``Novel Bank of Japan'', the theme is the post-war tilted
production system and the Fukuin inflation in which the Bank of Japan bought up
a large amount of Fukuin bonds of the Reconstruction Finance Corporation, which
supported it financially. was one of How much inflation did the post-war money
recovery inflation cause? The BOJ underwriting seems to have been a factor in
this, and to what extent did the BOJ purchase it in terms of Fukuin bonds and
Japan's GDP?
(Bard)
The ``Novel Bank of Japan'' was created when the Bank of Japan purchased a
large amount of Reconstruction Finance Bonds (Fukukin Bonds) issued by the
Reconstruction Finance Committee at the time, against the backdrop of the postwar
Japanese economic turmoil. It is a work with the theme of inflation, that is,
"recovery inflation".
During the period from 1946 to 1949, the
rebounding inflation caused a sharp increase in the wholesale price index of
about 220 times and the consumer price index of about 170 times. The main cause
of this inflation was the supply of a large amount of money to the market due
to the Bank of Japan's underwriting of refund bonds.
In the three years from 1946 to 1949, the
Bank of Japan underwrote approximately 2 trillion yen in bonds. This is
equivalent to approximately 130% of Japan's GDP (1.5 trillion yen) in 1949.
While the Bank of Japan's underwriting of
refund bonds played a certain role in Japan's post-war economic recovery, it
also caused inflation as a side effect. Inflation made life difficult for the
general public and caused social chaos.
In addition, the rebounding inflation was suppressed by a monetary tightening policy called the Dodge Line implemented in 1949.
(Nakamaru) Please contrast the current rise in
inflation in the Reiwa era with the post-war postwar inflation. By the way, the
Bank of Japan is currently buying up government bonds that exceed nominal GDP,
and the difference in inflation rates between Japan and the United States will
reverse in 2023 (Japan CPI increase rate > US CPI increase rate). The yen
has depreciated significantly to about 146 yen against the dollar, and even
with inflation of 3 to 4%, the negative policy interest rate has been
maintained, and the unusual monetary easing, which has already entered its 11th
year, has not stopped. Hmm...?
(Bard) The
current rise in inflation in the Reiwa era and the post-war postwar inflation
can be compared in the following points.
• cause
o The main cause of the recovery inflation
was the expansion of the money supply due to the Bank of Japan's underwriting
of a large number of reconstruction finance bonds.
o The current surge in inflation in Reiwa
is thought to be mainly due to supply constraints due to the war in Ukraine and
the corona crisis, and rising import prices due to the weaker yen.
• Scale
o The rebound inflation caused a sharp
inflation of about 220 times in the wholesale price index and about 170 times
in the consumer price index.
o The current surge in inflation in Reiwa
saw the consumer price index increase by 2.5% year-on-year in December 2022,
the highest level in about 14 years. can be said to be calm.
• Impact
o Refund inflation brought great suffering
to the lives of the general public and led to social turmoil.
o The current surge in inflation in Reiwa
has had a certain negative impact on the economy, such as reducing people's
willingness to buy and squeezing corporate profits, but it will not have a
serious impact like the rebound inflation. Not likely.
However, the current rise in inflation in
the Reiwa era continues. In the future, if inflation continues for a long time,
it may have a large impact on people's lives and the economy, just like the
rebound inflation.
Furthermore, the fact that the Bank of
Japan is buying up government bonds in excess of nominal GDP is a common
feature with monetary inflation. The Bank of Japan's quantitative easing policy
pumps a large amount of money into the market, potentially inducing inflation.
The reversal of the difference in the
inflation rates between Japan and the United States indicates that Japan is
under strong inflationary pressure due to rising import prices. The weaker yen
is also accelerating the rise in import prices.
The Bank of Japan has maintained negative
policy interest rates for the 11th year, and has not stopped its unprecedented
level of monetary easing. However, in order to curb the rise in inflation, a
shift in monetary tightening is considered necessary.
(Nakamaru) As mentioned earlier, the Japanese
economy is experiencing an inflationary gap in which aggregate demand exceeds
aggregate supply. It would be unfair to attribute the rise in inflation to
external factors such as the coronavirus pandemic or the war in Ukraine. This
is because, as I have already pointed out, US inflation has been falling below
Japan's inflation. The problem is future inflation in Japan. Inflation in
Japan, where the Bank of Japan holds government bonds exceeding the scale of
GDP, is different from that in the United States, and inflation control may
fail. Isn't Bard worried that this will be a repeat of the post-war money
inflation?
(Bard) Yes, I am concerned. According to the latest report from the Cabinet Office, Japan has already entered an inflationary gap. This indicates that the economy is overheating and aggregate demand exceeds aggregate supply.
External factors such as the corona crisis and the war in Ukraine may have temporarily increased inflationary pressure, but Japan has already turned into an inflation gap. Inflation is likely to continue.
In addition, the Bank of Japan's holdings of government bonds in excess of nominal GDP are also considered to be a factor that makes it difficult to control inflation. The Bank of Japan's quantitative easing policy pumps a large amount of money into the market, potentially inducing inflation.
From these points, it is thought that there
is a good chance that Japan will experience a resurgence of post-war monetary
inflation.
However, there are some differences between
the postwar postwar inflation and the current rise in inflation in Reiwa.
Postwar postwar inflation recorded a sharp rise in the inflation rate against
the backdrop of postwar turmoil and reconstruction demand. On the other hand,
the current high inflation in Reiwa is considered to be mainly caused by supply
constraints due to the war in Ukraine and the corona crisis, and the rise in
import prices due to the weak yen.
Therefore, it is difficult to imagine that
the current surge in inflation in Reiwa will record a sharp increase as in the
post-war recovery inflation. However, if inflation continues for a long period
of time, it could have a major impact on people's lives and the economy.
The Bank of Japan needs to consider
changing its monetary tightening policy to curb rising inflation. Specifically,
possible measures include raising policy interest rates and tightening the pace
of government bond purchases.
However, the Bank of Japan has so far been hesitant to change its monetary tightening policy. Therefore, there remains the possibility that high inflation will continue for a long time.
“The currency of the lord,” Sonno-joi and
hyperinflation at the end of the Edo period
(Nakamaru) By the way, the difference in the gold
and silver exchange ratio at the end of the Edo period, as mentioned in Masami
Sato's masterpiece ``The Currency of the Grand Master'' (Gold was three times
more expensive internationally in Japan due to the closed economy, and on the
other hand, silver was overvalued internationally). There was hyperinflation at
the end of the Edo period, which exploded with the advent of an open economy
(the opposite was true in the world's international markets).
The recent sharp
depreciation of the Japanese currency in Reiwa, the yen, is despite the US
raising its policy interest rate to 5.5%, despite Japan's recent rise in
inflation, even contrary to world common sense. In the sense that negative
policy interest rates are still being maintained, there is historical rhyme
between the "lord's currency" at the end of the Edo period and the
current Japanese currency of the Reiwa era, although we would not say that
history is repeating itself. I think it is.
In other words,
rather than external pressure, it smells like someone who doesn't open up the
country and completely ignores foreign countries and the external environment,
a son-in-law and a disregard for internationalism...?
Are my concerns
unfounded?
(Bard) Your
concerns are well-founded.
The difference in the gold and silver
exchange ratio at the end of the Edo period was caused by the national
isolation policy. The national isolation policy isolated Japan from the
international community and shut down the Japanese economy. As a result,
Japanese currency began to be traded at a price that diverged from the price on
the international market.
The depreciation of the yen in Reiwa is
similar to the situation at the end of the Edo period in that Japan is isolated
from the international community. Japan still maintains a closed economic
system and lacks sufficient interaction with the international community. As a
result, Japanese currency has come to be traded at a price that deviates from
the price on the international market.
Furthermore, the Japanese government
continues to maintain negative policy interest rates despite rising inflation.
This is a policy that significantly deviates from the common sense of the
international community, and could lead to further slump in Japan's economy.
Furthermore, the Japanese government does
not seem to be actively implementing policies to correct the weak yen. It
cannot be helped that this can be interpreted as an expression of an attitude
of respecting the king and expelling the foreigners, or of ignoring internationalism.
Of course, it cannot be said that Japan's
economy is completely the same as it was at the end of the Edo period. However,
if Japan's economy continues to isolate itself from the international community
and maintain a closed economic system, there is a strong possibility that
history will repeat itself.
In order to curb rising inflation and the depreciation of the yen, the Japanese government must urgently change its monetary tightening policy and take measures to correct the depreciation of the yen. It is also important to deepen exchanges with the international community and open up Japan's economy to the international community.
(Nakamaru) I agree. As has already been pointed out,
the difference between high and low inflation in Japan and the US will reverse
in the summer of 2023. The nominal policy interest rate in the United States is
approximately 5.5%, while in Japan it is -0.1%. After adjusting for inflation,
the real US policy interest rate is around 1-2% positive. Therefore, the dollar
is strong in the US and inflation is slowing. On the other hand, in Japan, the
real policy interest rate is at a negative 3% to 4% level, the yen is
significantly weaker, and domestic inflation is rising.
Just as at the end of
the Edo period, there was a three-fold difference in the gold and silver ratio
between Japan and the United States, the difference in interest rates between
Japan and the United States has now widened to approximately 5 to 6 percent in
both nominal and real terms. Assuming that government bonds have a remaining
maturity of 10 years, it would not be surprising in theory for the US
government bonds to appreciate by 50% to 60% in dollar terms in the future. To
that extent, there is the possibility of large imbalances or distortions
occurring in international financial markets.
Therefore, although
the Reiwa Japanese economy and financial markets may not be affected by the
hyperinflation experienced at the end of the Edo period, there is no guarantee
that they will not be hit by large-scale inflation comparable to the post-war
Fukkin era.
(Bard) Yes,
I think there is a good chance of that happening.
The interest rate differential between
Japan and the US has reached a historically high level. This interest rate differential
is a factor that increases the pressure on the yen and pushes up inflation in
Japan.
Furthermore, Japan still maintains a closed
economic system and lacks sufficient interaction with the international
community. This is also a factor in why Japanese currency is traded at a price
that deviates from the price on the international market.
Due to the combination of these factors,
there is a strong possibility that Japan will be hit by a major inflation
similar to that experienced immediately after the war.
Of course, if the Japanese government
shifts to tight monetary policy and takes measures to correct the weak yen, it
is possible that rising inflation could be suppressed. However, given the large
difference in interest rates between Japan and the United States and the
isolation of the Japanese economy from the international community, it will not
be easy to curb rising inflation.
The Japanese government needs to take
immediate action to curb rising inflation and the weakening of the yen.
(Nakamaru) Thank you.
(Bard) No,
you're welcome.
Tomo Nakamaru
Former World Bank Economist
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