The author seems to have not heard of the explanation that you cannot limit inflation that was not primarily caused by monetary policy through raising the interest rate. The whole point of raising the rate is to curb spending. People and businesses don’t borrow to finance new purchases, and don’t spend to the limit because with the low interest rates ‘it’s not worth it to save, now, anyway’. You raise the interest rates, the demand goes away, the prices stop rising and even fall. Success. Through throttling the economy you have reduced inflation.
This does not help matters when the inflation is caused, not by excess demand, but by scarcity. When that is the problem you don’t need to change people’s minds about making purchases — they’d already prefer to not make the expensive purchases. The problem is that they need to, or at least believe they need to make the purchases despite the high prices. (For another segment of the market, the problem is that they have so much money that they pretty much don’t care what something costs.)
Now, a great many central banks have long wanted to raise rates, not to combat inflation, but because they have been so low for so long that a bank that wanted to stimulate the economy by lowering rates cannot, because they are already on the floor. Thus raising rates now, because you can get people to believe that it is because of inflation rather than because you have wanted to make this correction for a decade or more now, and here is the chance! makes good banking sense.
But the Japanese, who don’t sit up nights worrying about inflation, may be a little hard to convince that raising rates will be good in the long term, when the exporters can definitely point to the harm of having too strong a Yen, especially when your trading partners are going through hard times.
Great commentary, especially “This does not help matters when the inflation is caused, not by excess demand, but by scarcity.”
So many economists, bankers and politicians do not seem to appreciate this – they are so clever and are in control.
The classic description is “Too much money chasing too few goods.”
Arkadian X
1 year ago
Who would have thought that wearing a mask is like taking part in a kabuki production.
Interesting article, though, thanks.
Last edited 1 year ago by Arkadian X
Nicky Samengo-Turner
1 year ago
Japan’s efforts at sustaining, let alone establishing a global too tier investment bank have failed 3 times, as they always think that ” They know better..” but do not appear to learn from previous errors. I have a morbid fascination for the bizzarre fact that Japan had a virtual global monopoly in and on computers, electronic goods, and wireless transmission technology and yet Sony, Sanyo, Panasonic et al let “Silicon Valley” take their monopoly, when they missed/ignored the crucial technology/ digital advances…. the same applies to smartfones.
The Japanese are the very best in all the world in taking an invention, and refining it so that it is the very best X that can be. It is an amazing talent. But they aren’t very good at coming up with the new thing at all. For all that they obsess about it all the time, and stuff tons of money into coming up with the next great thing, they just aren’t very good at coming up with it.
This made for a nice partnership with Bell Labs Research whose researchers could come up with the next great thing — as well as the next not-so-great thing and the next who-ever-thought-this-would-work-at-all — but who couldn’t do product development and marketing at all. Sony, Toshiba, and other household names all got their start here.
But with the breakup of AT&T’s monopoly, the good old days (if you were a researcher for Bell Labs, which was the top research job in the whole world) of sit around, think nice thoughts, make nice experiments, produce nice prototypes, patent everything you could (which in those days needed the nice prototype) and go on thinking the next new thoughts was over. There was no everfilling bucket of monopoly telephony money to fund all the research that the very cleverest researchers in the world wanted to do.
Somebody had to make the research pay off, despite the fact that nobody in the Bell Labs/AT&T/Lucent world knew how to do that, or else they would have been doing it already. So instead of letting the researchers think about whatever they liked, they started giving them direction. But the direction was often bad, and worse the researchers discovered that Bell Labs had just become another unpleasant place to work, rather than the Holy Grail of employment destinations.
But cool things were happening in Palo Alto. Maybe we should just move there and check it out 🙂 This was good for Silicon Valley, but it meant that the Japanese couldn’t just research Bell Labs patents in order to find out what to develop next. Apparantly the ability to tell which things coming out of Silicon Valley would be the next best thing, in the absence of a ‘made by a Bell Labs researcher’ label requires the same sort of skill as you need to come up with them in the first place, reminiscent of the Dunning-Kruger Effect.
Last edited 1 year ago by Laura Creighton
Ian Stewart
1 year ago
I’ve never understood the apparent ‘catastrophe’ that is the Japanese economy since the 90s because they still seem to be doing ok even as economists report they are in financial decline/stagnation. Is this the writer’s reference to their endurance giving the false impression that they are getting by?
Jon Hawksley
1 year ago
Day to day currency movements respond to arbitrage on relative interest rates, but only while sentiment on balance of payments is neutral. When balance of payment pressures are anticipated currency movements respond to them. If Yen inflation is lower than inflation in other countries the sentiment on balance of payments will change.
As Laura Creighton points out in her comment inflation is not currently driven by greed so curbing greed with interest rates rises is pointless.
Much of current inflation is energy prices from the own goal of sanctions against Russia. They have increased prices but not reduced Russian sales. Russia has increased its revenues and Europe has suffered unnecessarily. There is no world shortage of fossil fuels to hold prices up so they will go down, more so if the supply of renewable energy exceeds the increase in demand for energy.
The role of sentiment in economics is rarely fully appreciated. Interest rates are a blunt tool to try and alter sentiment which can be dwarfed by other factors.
Thatcher drove up unemployment to reduce inflation but she also talked the economy up – it would have been better to talk it down.
Jason Highley
1 year ago
Wait until they give up on yield curve control. There will be no announcement (almost necessarily) – it will just happen. The yen is going to get ground into dust.
The author seems to have not heard of the explanation that you cannot limit inflation that was not primarily caused by monetary policy through raising the interest rate. The whole point of raising the rate is to curb spending. People and businesses don’t borrow to finance new purchases, and don’t spend to the limit because with the low interest rates ‘it’s not worth it to save, now, anyway’. You raise the interest rates, the demand goes away, the prices stop rising and even fall. Success. Through throttling the economy you have reduced inflation.
This does not help matters when the inflation is caused, not by excess demand, but by scarcity. When that is the problem you don’t need to change people’s minds about making purchases — they’d already prefer to not make the expensive purchases. The problem is that they need to, or at least believe they need to make the purchases despite the high prices. (For another segment of the market, the problem is that they have so much money that they pretty much don’t care what something costs.)
Now, a great many central banks have long wanted to raise rates, not to combat inflation, but because they have been so low for so long that a bank that wanted to stimulate the economy by lowering rates cannot, because they are already on the floor. Thus raising rates now, because you can get people to believe that it is because of inflation rather than because you have wanted to make this correction for a decade or more now, and here is the chance! makes good banking sense.
But the Japanese, who don’t sit up nights worrying about inflation, may be a little hard to convince that raising rates will be good in the long term, when the exporters can definitely point to the harm of having too strong a Yen, especially when your trading partners are going through hard times.
Great commentary, especially “This does not help matters when the inflation is caused, not by excess demand, but by scarcity.”
So many economists, bankers and politicians do not seem to appreciate this – they are so clever and are in control.
The classic description is “Too much money chasing too few goods.”
Who would have thought that wearing a mask is like taking part in a kabuki production.
Interesting article, though, thanks.
Japan’s efforts at sustaining, let alone establishing a global too tier investment bank have failed 3 times, as they always think that ” They know better..” but do not appear to learn from previous errors. I have a morbid fascination for the bizzarre fact that Japan had a virtual global monopoly in and on computers, electronic goods, and wireless transmission technology and yet Sony, Sanyo, Panasonic et al let “Silicon Valley” take their monopoly, when they missed/ignored the crucial technology/ digital advances…. the same applies to smartfones.
The Japanese are the very best in all the world in taking an invention, and refining it so that it is the very best X that can be. It is an amazing talent. But they aren’t very good at coming up with the new thing at all. For all that they obsess about it all the time, and stuff tons of money into coming up with the next great thing, they just aren’t very good at coming up with it.
This made for a nice partnership with Bell Labs Research whose researchers could come up with the next great thing — as well as the next not-so-great thing and the next who-ever-thought-this-would-work-at-all — but who couldn’t do product development and marketing at all. Sony, Toshiba, and other household names all got their start here.
But with the breakup of AT&T’s monopoly, the good old days (if you were a researcher for Bell Labs, which was the top research job in the whole world) of sit around, think nice thoughts, make nice experiments, produce nice prototypes, patent everything you could (which in those days needed the nice prototype) and go on thinking the next new thoughts was over. There was no everfilling bucket of monopoly telephony money to fund all the research that the very cleverest researchers in the world wanted to do.
Somebody had to make the research pay off, despite the fact that nobody in the Bell Labs/AT&T/Lucent world knew how to do that, or else they would have been doing it already. So instead of letting the researchers think about whatever they liked, they started giving them direction. But the direction was often bad, and worse the researchers discovered that Bell Labs had just become another unpleasant place to work, rather than the Holy Grail of employment destinations.
But cool things were happening in Palo Alto. Maybe we should just move there and check it out 🙂 This was good for Silicon Valley, but it meant that the Japanese couldn’t just research Bell Labs patents in order to find out what to develop next. Apparantly the ability to tell which things coming out of Silicon Valley would be the next best thing, in the absence of a ‘made by a Bell Labs researcher’ label requires the same sort of skill as you need to come up with them in the first place, reminiscent of the Dunning-Kruger Effect.
I’ve never understood the apparent ‘catastrophe’ that is the Japanese economy since the 90s because they still seem to be doing ok even as economists report they are in financial decline/stagnation. Is this the writer’s reference to their endurance giving the false impression that they are getting by?
Day to day currency movements respond to arbitrage on relative interest rates, but only while sentiment on balance of payments is neutral. When balance of payment pressures are anticipated currency movements respond to them. If Yen inflation is lower than inflation in other countries the sentiment on balance of payments will change.
As Laura Creighton points out in her comment inflation is not currently driven by greed so curbing greed with interest rates rises is pointless.
Much of current inflation is energy prices from the own goal of sanctions against Russia. They have increased prices but not reduced Russian sales. Russia has increased its revenues and Europe has suffered unnecessarily. There is no world shortage of fossil fuels to hold prices up so they will go down, more so if the supply of renewable energy exceeds the increase in demand for energy.
The role of sentiment in economics is rarely fully appreciated. Interest rates are a blunt tool to try and alter sentiment which can be dwarfed by other factors.
Thatcher drove up unemployment to reduce inflation but she also talked the economy up – it would have been better to talk it down.
Wait until they give up on yield curve control. There will be no announcement (almost necessarily) – it will just happen. The yen is going to get ground into dust.