real GDP growth per capita and the BoJ
A brilliant veil-lifting article on the real GDP growth per capita of various countries over the past few years, written about half a year ago:
http://www.economist.com/finance/displaystory.cfm?story_id=10852462
While I am not a fan of the GDP measure, I did love the reality-basedness (is that a word?) of this article. By discounting population growth, a true measure of the actual increase in wealth creation can be more clearly seen. With real Japanese growth per capita snapping at the heels of the UK and above the USA, one is left pondering and in doubt about the quality of the large amounts of economic analysis intent on "fixing" Japan's economic issues. Particularly the obsession of many scholars with the "problem" of mild deflation deserves some further critical analysis.
Furthermore, as some of the economic growth in the UK and USA over the period in question are the result of an unsustainable residential real estate ponzi scheme which is now collapsing, Japan's economic performance may be seen in an even brighter light. However an offsetting factor may be the huge increase in Japanese government debt which may play a similar restrictive role in Japan's future economic development as the collapse of the real estate markets will for the UK and the USA.
The resistance of the Bank of Japan to taking more extreme measures to end Japan's low inflation/deflation (the rate has varied significantly above and below zero over the past few years) has received strong criticism from both the government of Japan and from a wide variety of international economists. Policy suggestions such as a much larger level of government debt monetization by the bank or the adoption of an official inflation target have met with consistent rebuke from the BoJ. The BoJ argues, among other points, that such policies could result in large excessive inflationary pressures that may be difficult to control and run the significant danger of trigging asset price bubbles, as has occurred in the past, or that greatly increasing it's level of monetization of the government debt itself creates a moral hazard as it discourages fiscal discipline on the part of the government and it is likely that the government would just waste any money received in this manner.
It would seem that the BoJ's policies have been vindicated by the performance of the Japanese economy and its restructuring to an environment of price stability. While the lack of inflation in Japan is slated as a cause of low domestic demand and a reduced incentive to invest, this is committing the same fallacy mentioned in a previous post of mine, of assuming that arbitrary consumption for the sake of consumption (and investment for the sake of investment) is a good thing, regardless of the fundamentals involved. It is the very lack of inflation in Japan that has discouraged "panic-buying" of assets and helped it to avoid malinvestment and over-leverage that has lead to bubbles in the UK and USA. Japanese corporate debt has fallen dramatically since the onset of deflation, with consumer debt also falling at a moderate rate and in stark contrast to the rise in consumer debt seen in the UK and USA. Further elaboration can be found in another brilliant article:
http://www.economist.com/finance/displaystory.cfm?story_id=12059274
Under price stability, Japanese market participants are free to make more rational consumption and investment decisions, as there is no longer a time correlated penalty to non-consumption and non-investment of cash holdings. A lack of inflation also reduces the incentive to increase leverage through debt issuance, as the real value of the principle will not be eroded over time.
I am personally very interested in the unsung benefits of a zero inflation environment and think it would be a fascinating research topic. It is apparent that it may provide significant robustness in resisting asset price bubbles and discouraging over-leverage.
The BoJ's policies may well be a glimpse of the future path of other central banks. Big Ben himself mentioned a month or so back that central banks may have to change their policies to try to actively target asset bubbles before they inflate too far with tighter policy, instead of letting them grow and explode on their own and then cleaning up afterwards with extremely aggressive preemptively loose policy. In saying that, given the overwhelming criticism in academic papers of the Bank of Japan's recent policies, including criticism from Big Ben himself, I find it difficult to imagine such a large ideological shift will be possible any time soon. Perhaps the current crisis may give an impetus to viewing the BoJ's policies in a kinder light.
