Japanese Writers Said No to the Kurofune of Google Book Search

As reported by Mercury Project Office, 180 Japanese writers including Shuntaro Tanigawa announced to refuse Google Book Search settlement scheme on April 30.

Tanigawa is a famous poet and known for his activities for copyright protection. They says "We have impression Google is public". However they are upset and say "they are arrogance". Also 2,197 writers want to join the settlement while they do not want delete their works from Google's database. It looks like a signal not to trust the service.

Writers don't understand the settlement when they accuse Google of the "arrogance". Google doesn't respond because they are prohibited by law. It's up to the administrator of the settlement. The bureau chief of the American Writers Association, who came to Japan this week, said the settlement is favorable to copyright holders because it enables to monetize out-of-print books.

Japanese writers say this is the "Kurofune (Black Ships) of copyright" that invade Japan. However, the Kurofune, which came to Japan 150 years ago, didn't invade Japan but wanted to open the country for western countries. The Tokugawa government opened Japan and the Meiji government reformed it. That's why Japan wasn't colonized by western countries. Now Japanese writers seem more ignorant than our ancestors.

More about Negative Interest Rate

It's very much discussed in Japan, but American economists aren't familiar with it. So here are links:

• Tyler Cowen: Give every voter a federal debit card. And put the money in their accounts. Tell them if they don't spend it this month, the government will take it back.
  
  
• Bernanke: Deflation: Making Sure "It" Doesn't Happen Here
  
  
• Eggertsson-Woodford: The Zero Bound on Interest Rates and Optimal Monetary Policy
  
  
• Hiroshi Ugai (BoJ): Effects of the Quantitative Easing Policy: A Survey of Empirical Analyses

There are many articles written about Krugman's article, but most of them are in Japanese. Overall, economists agree that negative interest rate is desirable if possible. But they are divided whether it's possible. Krugman argued it was possible, but he changed opinion recently. Bernanke commented on "flexible inflation objectives", but doesn't commit to the targeting.

Theoretically, the problem is how the Fed can make the expectation of inflation while it can't increase monetary aggregate. When the nominal interest rate is zero, as Krugman said, money and short-term bonds become perfect substitutes, so the Fed's operation will be buying a twenty-dollar bill with two ten-dollar bills. The BoJ tried the "time scale policy" to keep interest rate low until the inflation rate becomes positive. It was a little effective to suppress the long-term rate, but couldn't make inflation.

Greg Mankiw's Advice for Negative Interest Rate

Greg Mankiw recommends the negative interest rate in his NY Times article. He acknowledges Gesell and Keynes, but it's odd that he tells nothing about Krugman's famous article in 1998. In the article, Krugman built a toy model to recommend the inflation targeting to make the real interest rate negative. However, he writes in a recent entry of his blog:

In fact, I wrote down my original liquidity trap model starting from a firm belief that the liquidity trap was nonsense: even if the interest rate is zero, I thought, increasing the money supply must raise demand. So I set out to write a model with all the i’s dotted and t’s crossed, so as to demonstrate that point - and found, to my shock, that the model actually said the reverse.

What comes down to is this: once you've pushed the short-term interest rate down to zero, money becomes a perfect substitute for short-term debt. And any further increase in the money supply therefore displaces an equal amount of debt, with no effect on anything. Period, end of story.

If Mankiw hadn't read the 1998 article, I strongly recommend him to read it. If he read it, I wonder how he overcome the difficulty to make people expect inflation when the Fed can't increase the monetary aggregate, which Krugman gave up at last.

On the other hand, Mitsuhiro Fukao proposed a more direct way to make the interest rate negative - to tax the cash. It sounds even more bizarre than artificial inflation, but Fukao insists that it's legitimate to tax the cash. Other economists propose to make interest rate negative by electronic money.

Indeed Japan's experience of the "lost decade" isn't shared by American economists...

Paul Krugman's Contradictory Advices to Japan

Krugman is not known for consistency, but his comments on Japan's "lost decade" are remarkable. These are his advices:

Article in 1998: If the Bank of Japan adopts the inflation target of 4 percent for 15 years, it can create inflation expectation and escape from deflation.

NYT blog in November 2008: No matter how much Japan increases the monetary base now, expectations of future money supplies won’t move if people believe that the Bank of Japan will move to stabilize the price level as soon as the economy recovers.

Interview with the Yomiuri Shimbun in January 2009 (in Japanese): The Fed should make the inflation target of 4 percent for 15 years.

Rolling Stone in January 2009: There's no realistic prospect that the Fed can pull the economy out of its nose dive.

NYT blog in March: once you’ve pushed the short-term interest rate down to zero, money becomes a perfect substitute for short-term debt. And any further increase in the money supply therefore displaces an equal amount of debt, with no effect on anything.

Interview with VOICE in April (in Japanese): The BoJ should adopt the inflation target of 4 percent for 15 years.

In American media, he denies the effectiveness of the inflation targeting, but he insists on inflation targeting in Japanese media. Does he talk different economic theories in English and Japanese?

Martin Wolf's Wrong Lesson from Japan

Martin Wolf writes:

Despite a loss in wealth of three times GDP and a shift of 20 per cent of GDP in the financial balance of the corporate sector, from deficits into surpluses, Japan did not suffer a depression. This was a triumph.

It would be happy if our bitter experience in the 1990s were a triumph. Unfortunately, he is wrong. His only source is a book by Richard Koo, an economist who is not respected very much in Japan. His new book, The Holy Grail of Macroeconomics is full of factual errors.

He insists that the wasteful spending policy of Japanese government in the 90s rescued Japan from depression. The fact is shown in Fig. 1. Real GDP growth of Japan became negative after the first fiscal stimulus in 1992. After the biggest stimulus in 1998, GDP fell negative again. With additional stimulus in 1999, growth became slightly positive, but fell negative in 2001. Apparently the spending of a hundred trillion yen didn't much help.


Fig. 1Wolf writes:

The explanation was the big fiscal deficits. When, in 1997, the Hashimoto government tried to reduce the fiscal deficits, the economy collapsed and actual fiscal deficits rose.

This is wrong, too. Fig. 2 shows the real GDP growth from 1996 to 1997 in Japan. It shows that GDP rose in 10-12 in 1996 because consumers bought expensive goods before the tax hike in April 1997. Then GDP fell as a rebound in 4-6 and 7-9 in 1997. It recovered to the normal level in 10-12. In 1998, the GDP collapsed because of the credit crisis triggered by the bankruptcy of two major financial institutions in November in 1997.


Fig. 2
These are conventional wisdom among Japanese economists. If Wolf read, for example, Ihori et al., he would find that Koo's argument is completely refuted by professional economists. Their paper is written in Japanese, but FT must have translators. If you talk about Japanese economy seriously, you should read serious articles mostly written in Japanese. We don't talk about British economy with reading only one paperback in Japanese.

Deja Vu of the Lost Decade

The financial crisis is becoming more and more similar to that of Japan's "lost decade". The Economist says

According to the IMF, non-performing loans in Sweden reached 13% of GDP at the peak of the crisis. In Japan they hit 35% of GDP. A recent estimate by Goldman Sachs suggests that American banks held some $5.7 trillion-worth of loans in “troubled” categories, such as subprime mortgages and commercial property. That is equivalent to almost 40% of GDP.

Japan’s outcome—a decade in which growth averaged 1% a year and gross government debt rose by 80 percentage points of GDP—was not one to be proud of. But given the magnitude of today’s mess, it may soon seem not that bad after all.

Governor Shirakawa of the Bank of Japan said,

In light of our experiences during the financial crisis in Japan, the development of the current global financial crisis gives me a surprising sense of deja vu. Until recently, Japan’s financial crisis has been considered as an isolated event unique to Japan. It appears that people around the globe are gradually coming to understand the implications of the massive credit bubble and its burst through the bitter experience during the current crisis.

Since I experienced the crisis as a journalist in the 90s, the response of FRB and the U.S. Treasury is much quicker than that of BoJ and MoF, but the results are not so impressive. They won't repeat our mistakes, but they might make new mistakes because, in the word of Tolstoy, happy economies are all alike; every unhappy economy is unhappy in its own way.

Nationalization of Banks Is Only the Beginning

Alan Greenspan said "It may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring". The problem is not whether but when American government will announce the nationalization.

However, from the experience of Japan, the nationalization is the easier part. It's more difficult to manage the banks and dispose of the bad assets. Even more difficult is drawing the line which is to bailout and which is not. If the government bails out Citi and BankAmerica, and let other banks fail, the latter would sue the government. If the government bails out every bank, the budget deficit would be astronomical and dollar would crash so that the crisis would spread globally.

In Japan, Long-Term Credit Bank was nationalized after the severe attack to its stock in 1998 and Nippon Security Credit Bank followed. It was eight years after the burst of the bubble, but the problem was not finalized. Other "mega-banks" continued to dispose of the bad loans by "own responsibility". When Finance Minister Yanagisawa was fired and Economic Minister Takenaka took over his position in 2002, the disposal accelerated, because Takaneka threatened mega-banks saying "there is no bank which is too big to fail".

So the nationalization is not the end but the beginning of the problem. It's inevitable but not so effective measure to restructure banks. Anyway they should do it themselves. Government can only help it.

We Don't Want Tokyo Olympics

Tokyo city unveiled details of their bid to host the 2016 Olympics on Friday. Tokyo organizers say their bid offers "the most compact games" and "green energy" sources including solar and wind power. Tokyo Governor Shintaro Ishihara said "We hosted the Olympics in 1964 and plan to use many of those facilities which are still standing and in good condition." Tokyo city's report says that 70% people of Japan approve the Tokyo Olympics.

However, the residents of Tokyo, like me, are not so enthusiastic. According to the opinion poll conducted by the IOC, 59% of us approve the Tokyo Olympics, which is the least rate among the candidate cities. It's natural because we are suffering from the worst recession since the WW2. Tokyo is notorious for its shortage of medical care and the "commuting hell". The budget of 5 billion dollars can be used for more useful ends.

Where Have All the Inflation Targetings Gone?

Once upon a time, some economists in Japan argued that the inflation targeting was the "global standard" of economics and that economists who didn't adopt it "don't know economics" because prominent economists such as Bernanke and Stiglitz advocated inflation targeting. Their bible was Krugman's article titled "IT’S BAAACK!" written in 1998.

Now Krugman has officially withdrawn it:

I and others tried to make for Japan in the 90s and are trying to make again now: creating inflation is easy if you’re an irresponsible country. It may not be easy at all if you aren't. [...] No matter how much Japan increases the monetary base now, expectations of future money supplies won’t move if people believe that the Bank of Japan will move to stabilize the price level as soon as the economy recovers.

And Stiglitz says "Today, inflation targeting is being put to the test – and it will almost certainly fail." Bernanke, who once criticized the policy of the Bank of Japan (BoJ) as "extremely poor", doesn't even mention it when he can adopt it if he wish.

In fact, Krugman's proposal was different from the inflation targeting as price-stabilization targeting adopted in some European countries. He recommended the BoJ to promise to be irresponsible to change expectation. Since people don't expect inflation when they see deflation, the BoJ should commit flooding money indefinitely to make inflation of 4 percent for 15 years.

Krugman might have joked, as the paper's title suggested. Indeed such a proposal can be nothing but a joke. Who believes the BoJ's promise to be irresponsible? If inflation became 4 percent, it is rational for the BoJ to break the promise, so such a promise can't be subgame perfect, in terms of game theory.

His theory was not only wrong but harmful because it pushed the BoJ to continue unorthodox monetary policies such as zero-interest rate and "quantitative easing" too long. These policies induced yen-carry trades that amounted to one trillion dollars, which accelerated the American housing bubble that caused the current financial crisis.

Anyway, Krugman backed off. But the Japanese economists who embraced his theory keep silent, probably because it would overturn their credibility (if any). It was the most shameful economic controversy in Japan, for which Krugaman is partly responsible. I recommend him to delete his wrong article and apologize to Japanese people with his followers.

Don't Embrace Inflation, Prof. Rogoff

Kenneth Rogoff, a Harvard Professor and former chief economist of IMF, wrote an essay that recommends inflation targeting. Inflation targeting is a usual policy measure, but this isn't lowering but raising the inflation rate to six percent. He writes:

Fortunately, creating inflation is not rocket science. All central banks need to do is to keep printing money to buy up government debt. The main risk is that inflation could overshoot, landing at 20% or 30% instead of 5-6%. Indeed, fear of overshooting paralysed the Bank of Japan for a decade. But this problem is easily negotiated. With good communication policy, inflation expectations can be contained, and inflation can be brought down as quickly as necessary.

It's sad that such an influential economist as Rogoff doesn't know the true lesson of the Bank of Japan. They were not paralyzed by overshooting but undershooting that the inflation didn't occur in spite of their "quantitative easing" with which they put 35 trillion yen ($ 380 billion) to bank's accounts in the BoJ. Because, as Rogoff apparently knows, monetary aggregate isn't controllable by central banks that supplies the monetary base. The former is an endogenous variable determined by money demands of private sectors.

Especially when the economy suffers from deflation, the natural rate of interest is less than zero, so the real interest rate (nominal rate plus deflation rate) will be higher than the natural rate because nominal rate can't be negative. When the real interest rate is higher than the natural rate, deflation will occur, as Wicksell predicted a hundred years ago. Paul Krugman wrote ten years ago:

A liquidity trap may be defined as a situation in which conventional monetary policies have become impotent, because nominal interest rates are at or near zero - so that injecting monetary base into the economy has no effect, because monetary base and bonds are viewed by the private sector as perfect substitutes.

Japan experienced exactly as he predicted: while the BoJ dropped the interest rate to zero and supplied huge amount of monetary base, the monetary aggregate didn't increase because money demand was very weak. So Krugman was right when he wrote:

If the central bank can credibly commit itself to pursue inflation where possible, and ratify inflation when it comes, it should be able to increase inflationary expectations despite the absence of any direct traction on the economy via current monetary policy.

However, it's difficult for the BoJ to commit making inflation when they are impotent to increase monetary aggregate. Krugman recommended the BoJ to be irresponsible to seek a higher future price level. Unfortunately this policy isn't subgame perfect, using the term of game theory. In the subgame after inflation occurs, the BoJ will abandon the inflation policy. As rational players know it, they won't make the forward-looking expectation of inflation. So the subgame perfect equilibrium is no inflation at all.

These are elementary theories supported by the painful experience of Japan. For example, Hiroshi Ugai of the BoJ wrote a survey article of many empirical findings. He concludes:

Granted the positive above effects of preventing further deterioration of the economy reviewed above, many of the macroeconomic analyses conclude that the Qunantitative Easing Policy's effects in raising aggregate demand and prices were limited. In particular, when verified empirically taking into account the fact that the monetary policy regime changed under the zero bound constraint of interest rates, the effects from increasing the monetary base were not detected or smaller, if anything, than during periods when there was no zero bound constraint.

Indeed, Prof. Rogoff, creating inflation is not rocket science. It's much more difficult to create inflation when deflation is going on than launching rockets.