Hi Jim D.:
>Yoshie quotes Jan Kregel saying>Clearly, in present conditions it is
>not the lack of a credible inflation policy [as he dubs Krugman's
>cure], but a credible interest rate policy that is creating
>difficulty. As Keynes notes in relation to Fisher's recommendations
>of inflating out of the Great Depression: "The stimulating effect of
>the expectation of higher prices is due, not to its raising the rate
>of interest (that would be a paradoxical way of stimulating output
>--in so far as the rate of interest rises, the stimulating effect is
>to that extent offset), [*1] but to its raising the marginal
>efficiency of a given stock of capital" (JMK:VII, p. 143) that is,
>raising the expectation of returns on new investment relative to the
>rate of interest, and this requires a credible policy that interest
>rates will not rise along with the rate of inflation, which is to
>say that the Fisher relation and the quantity theory should not
>hold. [*2]
>
>[*1] I think Keynes is off-base here. As I see it, Fisher was
>recommending a cut in nominal interest rates in the short run, which
>encourages inflationary expectations, which lowers the
>much-more-important expected real rate. In a situation of unused
>capacity and extreme unemployment, there is little reason to expect
>the nominal rate to rise in step with inflationary expectations (as
>Keynesian economics points out), so there is no reason why we
>shouldn't see real rates falling.
You are right with regard to the Great Depression in the 30s, but
today's Japan does not have "extreme unemployment," which has been
one of the reasons why we haven't seen working-class revolts yet.
Hardships have mainly hit new women college graduates, salarymen
nearing the retirement age, small shop & factory owners & workers,
etc., I think.
>[*2] here's where PK, not Keynes, is wrong, because he doesn't pay
>attention to the marginal efficiency of capital (roughly, the
>expected rate of profit). It's possible that real private investment
>won't respond, even to negative real interest rates. (The IS curve
>may be vertical or close to it.) Here pen-l faces a disagreement:
>Peter says that Japanese private corporations and banks face stuff
>like low profitability, excessive debts, pessimistic expectations,
>and unused capacity, while Dennis (always an optimist concerning
>Japan) sees profitability recovering. It would great to see some
>evidence.
***** Public Information Notice (PIN) No. 00/64
August 11, 2000
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA
IMF Concludes Article IV Consultation with Japan
On August 4, 2000, the Executive Board concluded the Article IV
consultation with JAPAN.1
...Economic growth, as shown in the national accounts, has been
uneven over the past year and a half. In the first half of 1999, GDP
expanded by 3? percent (annual rate), driven by a rebound in
confidence and fiscal stimulus measures. The economy contracted
again in the second half of 1999, reflecting renewed weakness in
private consumption and a sharp contraction in public investment,
though business investment surged in the fourth quarter, as
profitability recovered and sentiment improved. GDP figures for the
first quarter of 2000 suggest growth of 10 percent at an annual rate,
with strong contributions from private consumption, business
investment, and net exports. However, the confluence of a number of
temporary factors -- including the delay in the end-1999 bonus
payment, the leap-year effect, as well as the unwinding of the
pre-Y2K buildup of import stocks -- seems to have accounted for about
half the first quarter rise of 2.4 percent. The recent pickup in
activity appears heavily concentrated in "high-tech" sectors....
[The full article is at
<http://www.imf.org/external/np/sec/pn/2000/pn0064.htm>.] *****
***** Monthly Report of Recent Economic and Financial Developments
(October 2000) 1
(The Bank's View 2)*
(English translation prepared by the Bank staff based on the Japanese original)
1 This report was written based on data and information available
when the Bank of Japan Monetary Policy Meeting was held on October
13, 2000.
2 The Bank's view on recent economic and financial developments,
determined by the Policy Board at the Monetary Policy Meeting held on
October 13 as the basis of monetary policy decisions.
October 16, 2000
Bank of Japan
* The English translation of the full text will be available on October 24.
Japan's economy is recovering gradually, with corporate profits and
business fixed investment continuing to increase.
With regard to exogenous demand, public investment is starting to
decrease since the implementation of the supplementary budget for
fiscal 1999 has peaked out. Net exports (real exports minus real
imports) continue to follow a moderate upward trend due to steady
developments in overseas economies. As regards domestic private
demand, business fixed investment is on an increasing trend. The
recovery in private consumption continues to be weak as a whole
through lack of notable improvements in employment and income
conditions, although there are somewhat positive signs in some
indicators. Housing investment is mostly unchanged.
Reflecting such developments in final demand, industrial production
is increasing. Corporate profits and sentiment continue to improve,
and the number of firms that take positive action, such as increasing
the amount of fixed investment, is increasing, especially in
high-growth sectors. Income conditions of households still remain
severe but regular and overtime payments as well as new job offers
continue to increase in line with the recovery in corporate
activities, and compensation of employees has stopped decreasing.
As for the outlook, public investment is expected to decrease. While
the expansion in overseas economies is likely to continue, the
increase in exports is likely to slow down as restocking activity in
Asian economies has peaked out. Meanwhile, imports are projected to
continue increasing, particularly for those of information-related
goods. Therefore, real exports will level off for a while. In the
corporate sector, firms still strongly feel that they have excess
equipment and that they should reduce their debts to restore
financial soundness. However, it is very likely that fixed
investment in high-growth sectors, including those related with
information technology services, will increase as corporate profits
continue to recover. Moreover, an improvement in corporate profits
will increase household income and this in turn is expected to boost
private consumption. However, the pace of recovery in household
income will be modest for the time being, since firms' perceptions of
excess employment still persist, and thus significant changes have
not been observed in their efforts to reduce personnel expenses.
Overall, the economy is likely to recover gradually led mainly by
business fixed investment, while the developments in crude oil prices
as well as foreign and domestic capital markets, along with their
effects on the economy, need careful monitoring. In addition, the
favorable financial environment created partly by the Bank's
sustaining easy monetary stance is expected to continue underpinning
the economy.
With regard to prices, import prices are rising, reflecting an
increase in international commodity prices such as crude oil prices
since April. Domestic wholesale prices, notwithstanding the rise in
prices of petroleum products reflecting the increase in crude oil
prices, are mostly unchanged mainly due to the decrease in prices of
electric machinery. Meanwhile, consumer prices continue to be
somewhat weak owing to the decline in prices of imported products
reflecting the past appreciation of the yen, although prices of
petroleum products and electricity increased from the rise in crude
oil prices. Corporate service prices are still falling slowly.
As for the outlook on prices, downward pressure on prices stemming
from weak demand is declining significantly while an economic
recovery is expected to continue moderately. Upward pressure on
prices is likely to arise temporarily from the increase in crude oil
prices. On the other hand, in addition to the declining trend of
machinery prices due to technological innovations, the decline in
prices of consumer goods arising from the past appreciation of the
yen and the streamlining of distribution channels will exert downward
pressure on prices. Thus, prices overall are expected to be stable
or weak somewhat.
In the financial market, the overnight call rate is generally moving
around 0.25 percent. The amount of funds outstanding in the call
money market has increased slightly.
As for interest rates on term instruments, those on contracts
maturing beyond the year-end have risen somewhat. The Japan premium
remains negligible.
Yields on long-term government bonds are generally moving in the
range of 1.8-1.9 percent. The yield spread between private bonds
(bank debentures and corporate bonds) and government bonds remains
mostly unchanged as a whole.
Stock prices dropped from early October and are recently moving
around the lowest level since the beginning of this year.
In the foreign exchange market, the yen depreciated gradually from
the end of September and the yen-dollar exchange rate temporarily
rose to 109-110 yen. The yen is currently being traded in the range
of 107-109 yen to the U.S. dollar.
With regard to corporate finance, private banks continue to be more
active in extending loans mainly to blue-chip companies, while
carefully evaluating the credit risks involved.
On the other hand, the improvement in economic activities has not
stimulated corporate demand for external funds, since firms' cash
flow is at a high level in parallel with recovery in profits.
Moreover, firms continue to reduce their debts as part of their
balance-sheet restructuring measures. As a result, credit demand in
the private sector has continued to be basically stagnant.
In view of this, the underlying tone of private banks' lending
remains sluggish. Recently, however, the expansion in the
year-to-year decline seems to be ceasing. Issuance of corporate bonds
and CPs has been steady.
Money stock (M2 + CDs) grew faster in September compared with the
previous month on a year-on-year basis.
Recently, funding costs for firms are somewhat increasing, due to the
rise in money market rates after the termination of the zero interest
rate policy.
In this financial environment, there seem to be no substantial
changes in the lending attitude of financial institutions and easing
of corporate financing conditions.
<http://www.boj.or.jp/en/siryo/siryo/gp0010.htm> *****
What's your diagnosis?
Yoshie
