Japan: So Far So Good, But Not Enough

There are at least three criteria for judging whether Japan’s new monetary stimulus is a success:

1. Did it boost expected NGDP growth?
2. Did it result in 2% expected inflation?
3. Will it allow Japan to exit the liquidity trap?

Regarding the first criterion, it’s already a success.  There’s no plausible model that has monetary stimulus boosting real equity prices by more than 50% in a few months, and failing to boost expected NGDP growth at least a tiny bit.  So that’s already a done deal.

Regarding the second, consider this:

TOKYO (Reuters) – The Bank of Japan has taken all necessary steps to meet its 2 percent inflation target in two years and will try to minimize the market disruption from its massive bond buying, Governor Haruhiko Kuroda said on Friday.

Kuroda conceded that some people doubted the BOJ could meet its inflation goal and said unexpected events could mean it would take longer than planned, but said the BOJ would maintain its new policy framework for as long as needed.

“We feel we’ve taken all necessary steps to achieve 2 pct inflation in two years, but it’s not appropriate to limit our policy to two years,” Kuroda said in a speech.

Unfortunately Japan does not have adequate CPI futures markets, but my sense is that they have not done enough. Indeed I think Mr. Kuroda understands this, which is why he extends the timetable to more than 2 years.  Elsewhere they indicated that they would define success not just in terms of inflation but also RGDP growth, which is an implicit nod toward NGDP targeting.  That’s good, but it would be better if they made it explicit.

Of course the biggest mistake is a lack of “level targeting.”  If they fail to hit their 2% inflation target it will most likely be due to the decision to go with growth rate targeting, rather than the level targeting that Bernanke once recommended the Japanese adopt.

The third goal seems the least likely to be met, despite this optimistic report from Goldman Sachs:

In further evidence of growing exuberance over prospects for Japanese stocks, U.S. investment bank Goldman Sachs late Thursday upgraded its 12-month target for both Japanese benchmarks – the Nikkei and Topix – on expectations of bumper earnings growth.

It increased its target for Nikkei (Nihon Kenzai Shinbun: .N225-JP) to 16,000 from 15,000 and for the Topix to 1,350 from 1,250 earlier, which marks a near 20 percent upside from current levels.

“Last week’s announcement by [Bank of Japan] Governor Haruhiko Kuroda was the most credible attack on deflation that Japan has seen in a very long time, there’s prospect for Japan to exit this liquidity trap and get its domestic economy back on its feet,” Kathy Mitsui, chief Japan strategist at Goldman Sachs told CNBC on Friday.

And yet long term bond yields are still ultra-low.  I don’t see even a shred of evidence that Japan is likely to exit the zero rate bound in the foreseeable future.

Still, faster expected NGDP growth is the most important objective, and there’s no doubt in my mind that they’ve already had limited success in that very important endeavor.

Some commenters complain that I never take a stand on what will “work.”  OK, the yen has fallen from 76 to 99.  I say that if the BOJ cuts the yen to 125/$, they will likely get inflation.  If they cut it to 140 they will almost certainly get inflation.  Recall that the yen was in the 120s as recently as 2007.  The BOJ knows what it needs to do; will it do it?