Ron Dore wrote:

> BoJ has certainly been prnting
money.

>

It's printing enough so that 3-year JGBs now yield a mere 0.145%, just a smidgeon above the 0.1% on overnight money. (A $1,000 bond yields a mere $1.45 in interest per year).

RD:

> But what has it done with it?
Given it to banks and insurance

> companies in exchange for JGBs, thus keeping up the
price of the

> latter and giving banks more cash for which they
cannot find worthy

> borrowers and so stash away in their deposits with
BoJ.

>

I agree. Japan is in a classic Keynesian liquidity trap in which just printing money ("quantitative easing") won't work because borrowers don't want to borrow, even when interest rates are on the floor. The average rate on new loans is just 1.06%.

RD:

> Meanwhile large amounts of JGBs
are newly minted to cover a big

> fiscal deficit, while, trying to narrow the deficit
by increasing

> taxes and thus plunging the economy ever deeper into
gloom, causing

> animal spirits to evaporate in thin air.

>*

Problem is not lack of animal spirits but lack of real aggregate demand. Consumers' real income is stagnant and firms don't want to invest if final demand is not growing. That is precisely the situation in which fiscal demand is needed.

RD:

> If it printed money and simply
gave it to the Government to cover the

> deficit and the government firmly told bond-holders
that they were

> going to go on doing that until inflation got to 5%
(they'd
probably

> have to change the BoJ law first)

Again, I agree. What is needed, as you say, is a combination of fiscal and monetary stimulus. The government runs fiscal stimulus (tax cuts and the right kind of spending) to generate real demand and the BOJ monetizes the debt to prevent interest rates from rising and to prevent the amount of debt held by the public from rising. This is, by the way, something that Ben Bernanke had proposed almost a decade ago in a speech in Tokyo. It was rejected by both BOJ and MOF.
You can print all the money that you want--and declare any target you want--but unless it causes people and firms to go out and spend, it won't change aggregate demand and therefore won't create inflation. Fiscal stimulus creates that demand. Both BOJ and MOF and all too many economists reject this notion. Just look at what they've done to Europe. BTW, even if the BOJ wanted to do this, the MOF and ruling parties would have to agree on the fiscal side. The BOJ can buy every single new JGB issued by the government but if the latter is shrinking the deficit, it won't boost demand.
Tthe impact on demand is not the size of the deficit per se, but whether it is growing or shrinking. To get demand to grow, the deficit has to grow.

RD:

> That would REALLY be printing
money. And the sell-off of JGBs by the

> scared markets would soon take care of Katz's zero
interest
problem.

>

Why would the markets sell off JGBs as long as the BOJ is buying? The more that the BOJ buys JGBs and lowers interest rates, the more that existing JGBs rise in prices. It matters not whether the BOJ buys them from the private market or from the government.

RD:

> It's not a matter of the
intellectual mistakes of monetarist

> economists. It's a matter of political power being
exercised in

> favour of the holders of financial assets who don't
want to see the

> value pf their property fall, rather than in favour
of all those

> people out of work because of the output gap.

>
I disagree. In this, too, I agree with Keynes, who pointed out that, sometimes, bad ideas of "defunct economists" and other ideologues have a far more powerful impact than rational interest group politics.
Holders of JGBs, as I said above, would find their prices rising if the BOJ did what you suggest. Holders of real estate would find prices rising. In this case, it is not the power of interest goups, but ideology, that is creating all the mischief. That isn't always the case, but it is here, in my opinion. I am stunned at how often companies and banks and investors are so incredibly short-sighted about their own interests.

There is one other wrinkle that is power-related. The MOF and its Diet allies do have an interest in insisting that the BOJ can defeat deflation on its own.
That takes the MOF off the hook to provide fiscal stimulus and the MOF is almost always for tightening the fiscal belt. Not so incidentally, the MOF made the same pressure in the late 1980s (when the BOJ was still under the control of the MOF) to fight the recessionary effects of the yen rise. The MOF insisted that it could be handled solely via monetary ease, no fiscal ease.
The bubble was, in part, the unintended consequence of this policy.

Richard Katz
The Oriental Economist