QE May or May Not Work for Japan; Deep Negative Interest Rates Are the Surefire Way for Japan to Escape Secular Stagnation

In my view “secular stagnation” is simply a name for being stuck at the zero lower bound. Yimian Wu interviewed me in an article for MarketWatch about whether Japan was on the road to getting the higher inflation it wants in order to make the zero lower bound less binding. In the article she writes:

University of Michigan economics professor Miles Kimball, said Japan should keep stimulating its economy until it is overheated to a point that the inflation rate is higher than desired.

This deserves clarification. What I said is this: I think there is still a lot of slack in the Japanese economy, and I will only believe that the slack in the Japanese economy is exhausted when Japan gets more inflation than it wants. To find out exactly how much slack it has, it is worth it for Japan to risk higher-than-desired inflation.

When I walk around Tokyo, I see many workers doing low-productivity activities that no one would ever be paid to do in the US. So I think there is a lot of potential to increase output per work hour by having workers work more intensely or do higher productivity activities as demand picks up. 

Hanging on to workers even if there isn’t much of any great importance to do is sometimes called “labor-hoarding.” The amount of labor-hoarding in Japan is reflected by its historically high percentage of extra output from each percentage point reduction in unemployment in Japan’s version of Okun’s law. And historically, Japan has been able to have quite low unemployment rates without accelerating inflation.  

Yimian goes on to write about her phone interview with me:

However, he said Japan’s large-scale QE might have some side effects that can’t be predicted. “We knows a fair bit about what it (quantitative easing) does with a certain dosage, and then you triple that dosage and nobody knows.”

Instead of quantitative easing, Kimball advocated negative interest rates. In a phone interview, he explained that cutting interest rates, even below zero, would have a more direct effect in stimulating the economy than increasing long-term bond purchases.

In addition to the phone interview, Yimian emailed a set of questions, which I answered as follows:

Yimian: How would you comment on Japan’s Quantitative Easing from 2001-2006? It clearly did not help improve inflation but without the QE, would Japan’s economy then be worse? Did it increase economic activities?

Miles: The size of QE during that period was quite small. I wouldn’t have expected it to do much, and it didn’t do much. 

Yimian: How would you comment the QE starting in 2013? When do you expect Japan would exit QE this time? When do you project Japan can hit the 2 percent inflation target?

Miles: Here is what I have written on recent QE in Japan:

With a negative interest rate policy, as I would recommend, it is not necessary to hit a 2% inflation target. What matters is getting to full employment, which is quite achievable. Once Japan is at full employment so people can easily find jobs, the Japanese government should take measures to make layoffs easier so that people can be steered away from less productive toward more productive work.  

Yimian: Do you think a large scale of QE is sustainable for Japan, considering its speed and scale of asset purchase? How would you compare the two QE programs, in terms of goal, scale and impact? Did the two QE spur company borrowing and consumer spending? Real wages and household savings seem to continue declining, how will QE work if consumers have less to spend and consumption tax is increased?  

Miles: QE is a very risky way to go because it might not work. Also, no one knows the side effects of very large doses of QE. There is no real experience from other countries in the use of QE starting from such a low level of inflation. The surefire way to get the economy to full employment is to use negative interest rates.

… I have links to other things I have written and a video of an interview you should look at here:

Also, you should be aware that many of the shorter pieces I have written on negative interest rate policy have been translated into Japanese: