Saturday, September 26, 2015

A return to deflation in Japan wouldn't be out of the cards

Tyler Cowen is puzzled by deflation in Japan, Scott Sumner replies and says there's no puzzle (looking at core inflation). It would be really nice if either of them could give a graph with a line and maybe some error bands where they'd expect inflation (or the price level) will be. Like this:


That's the latest update of the core CPI price level in Japan (the last update is here).

The question is why is this happening? Japan is still printing physical currency (M0) at an average rate of between 3 and 4% per year and averaging a few percent nominal growth. Cowen seems to blame credibility (and low velocity).

In the information transfer model, this is actually a long run trend across all economies:


And it points to the existence of an "economic temperature" that goes as 1/log M0. There is more discussion in my draft paper (the section on statistical economics), but in general as economies grow the most likely state for a given Yen (or Dollar or Pound) is facilitating a transaction in a low growth market. Eventually the information content of a Yen of money is equal to the information content of a Yen of output.

9 comments:

  1. "The question is why is this happening? Japan is still printing physical currency (M0) at an average rate of between 3 and 4% per year and averaging a few percent nominal growth. "

    In the last 30 days Japan has increased their base money supply by more than 3%. They report every 10 days and the last 3 are 1.2%, 1.2%, 0.7%: The first link below 31.7% increase in the last year.
    http://www.bloomberg.com/quote/BJACTOTL:IND
    http://www.boj.or.jp/en/statistics/boj/other/acmai/index.htm/

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    1. M0 (the currency component of the base) has only increased by a few percent, though. Reserves don't seem to matter for inflation:

      http://informationtransfereconomics.blogspot.com/2014/11/quantitative-easing-cleanest-experiment.html

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    2. If a bank sends an armored truck to the central bank it can convert its extra reserves to physical currency. Perhaps it would have to wait while they printed more money.

      So it is as if the extra base money is not circulating and so just lowering the velocity of money. But it is there and could circulate if something changed.

      Interesting times.

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    3. In the last 10 days the banknotes have gone up by more than 1%. This does not seem normal:
      http://www.boj.or.jp/en/statistics/boj/other/acmai/index.htm/

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    4. Just plotted Japan's currency data from above link for this year:
      https://plot.ly/~vincecate/7/col2/?share_key=JNZ0At5ivbssHNsbwjUQYj

      The last 3 months it is up like 3% but hard to say if this is the start of something longer yet. From start of year it is only like 1.5%.

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    5. Japan has a somewhat different seasonal structure relative to the US ... Over the next couple months the amount of currency will rise and then fall again next year.

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  2. Have some respect pompous poser. Were you raised by wolves?

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    Replies
    1. General calls to "have some respect" are usually in service of the status quo.

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    2. This comment is racist towards wolves. Wolves are a very respectful people.

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