Rising NGDP in Japan equals jobs, jobs, and more jobs
The labor market data out of Japan is nothing short of spectacular. The most recent data shows the rate falling to 2.8%, the lowest rate in decades:
And that’s not just due to people abandoning the labor force, as has been claimed regarding US data. In start contrast to the US, the employment to population ratio is soaring to new highs. This is from a Matt O’Brien article in the WaPo:
Anecdotal evidence also suggests an ultra-tight labor market:
Every shop and restaurant in Tokyo seems to have a “positions vacant” sign, and many are scrapping 24-hour opening to save labour. Yamato Transport, the country’s largest logistics company, is raising prices for the first time in 27 years in a deliberate attempt to cut volumes to a level its network can handle. Rather than cutting costs, chief executives spend their time working out how to hire and retain staff.
After more than two decades when labour was cheap and abundant, Japanese companies are finding ways to cut back, reducing their lavish service standards rather than raising prices. But this can only go so far. Japan is primed for inflation.
The struggles of the stimulus must also be weighed against the global economic backdrop. The plunge in 2014 in commodity prices, followed by the 2015 slowdown in emerging markets, leading to a sharp appreciation of the yen, were a terrible environment in which to generate inflation. Only with the election of Donald Trump as US president, and the subsequent rally in the yen above ¥110 to the dollar, is the global economy once again a support.
That’s right, this success occurred against a backdrop of substantial headwinds. How did they do it? After he took office at the beginning of 2013, Abe set a goal of raising NGDP from 492 trillion to 600 trillion yen. The inflation target was raised to 2%, and Kuroda was appointed to lead the BOJ. NGDP started rising almost immediately, breaking out of a two-decade period of sluggishness.
To be sure, there are weaknesses. Inflation has averaged less than the 2% target, and is expected to continue doing so. There was no date given for the 600 trillion yen NGDP target. But overall, Abenomics has been a big success.
It’s also boosting RGDP. Here’s the Financial Times:
Japan has recorded its longest run of sustained growth in more than a decade as stimulative policy and a healthier global economy lead to a period of robust progress.
Growth for the first quarter of 2017 came in at an annualised 2.2 per cent, according to the Cabinet Office, marking five quarters of continuous expansion in gross domestic product.
The figure beat the consensus analyst forecast of 1.7 per cent and is far above Japan’s long-run growth potential of roughly 0.7 per cent. That suggests the economy is using up spare capacity and unemployment will keep on falling.
The lesson here is that when you have a labor market that is facing inadequate AD, the solution is simple—more NGDP. But printing money can’t perform miracles. Relatively soon Japan will reach capacity, and RGDP growth will stop. At that point the BOJ must keep NGDP growing at 2% per year to ease its public debt burden.
And all of this occurred against a backdrop of zero interest rates and fiscal austerity—something Keynesians insist is impossible. I can’t emphasize enough that Keynesian economics has negative value added, it simple doesn’t help us to understand what’s going on around the world.