Unfortunately what Japan risks is an exit from headline deflation but no growth in output and employment to show for it. What they’ve done might be to cause the currency to depreciate about 25% via ‘portfolio shifting’, which may not expand real domestic demand. In fact, in real terms, it may go down, leaving them with higher prices and a lower standard of living.
Yes, the currency shift makes imports more expensive, which means there will be some substitution to domestic goods which cost more than imports used to cost, but less than they now cost. But for many imports there are no substitutions, so the price increase simply functions like a tax increase.
And yes, exports, particularly nominal, will go up some, but so does the cost of inputs imported. And yes, some inputs sourced elsewhere will instead be sourced locally, adding to domestic employment and output, but not to real domestic consumption.
At the macro level what counts is what they do with regards to keeping the govt deficit large enough to accommodate the need to pay taxes and net save. Net exports ‘work’ by reducing real terms of trade when the govt purchases fx, which adds net yen to their economy. I call the fx purchases ‘off balance sheet deficit spending’. But so far the govt at least says they aren’t even doing that, and the lifers etc. now deny having done much of that either?
What has changed fundamentally is they are importing more energy since shutting down their nukes. Again, this functions as a tax on their economy (taxonomy for short? really bad pun intended!).
On the other hand, as above, buying fx by either the private or public sector is, functionally, deficit spending, which in this case first supports exports, but could add some to aggregate demand, depending on the details of relevant propensities to consume, etc.
The entire point of all this is Japan can cause some ‘inflation’ as nominal prices are nudged up by the currency depreciation, but with only a modest increase in real output via an increase in net exports that fades if not supported by ongoing fx purchases. And all in the context of declining real terms of trade as the same amount of labor buy fewer imports, etc. which is the engine that makes it ‘work’ on paper.
And for the global economy it’s another deflationary shock in a deflationary race to the bottom as other wanna be exporters compete with Japan’s massive cut in real wages.
So yes, they are trying to cause inflation, but not for inflation’s sake, but as a way to increase output and employment. But I’m afraid what they are missing that the causation doesn’t work in that direction.
In conclusion, this was the thought I was trying to flesh out:
Just because increasing output can cause inflation, it doesn’t mean increasing inflation causes real output and employment to increase.
sorry, this all needs a lot more organizing. Will redo later.
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