Q&A Japan style – Part 5b

Published by Anonymous (not verified) on Thu, 05/12/2019 - 6:24pm in



This is the final part of a two-part discussion about the consequences of a currency-issuing government exercising different bond-issuing options. The basic Modern Monetary Theory (MMT) position is for the currency-issuing government to abandon the unnecessary practice of issuing debt (which is a hangover from the fixed exchange rate, gold standard days). Currency-issuing governments should use that capacity to advance general well-being and providing corporate welfare to underpin and reduce the risk of speculative behaviour in the financial markets does not serve any valid purpose. However, when we introduce real world layers (politics, etc) we realise that some pure MMT-type options are not possible. This question introduces just such a case in Japan. Given the political constraints, we are asked to choose between two options for central bank conduct, when the government does issue debt: (A) Buy it all up in the secondary bond markets. (B) Leave it in the non-government sector. In this final part, I go through some of the considerations that might influence that choice.


In the first part – Q&A Japan style – Part 5a (December 3, 2019) – the proposition was put that in Japan both sides of politics – the progressive Left parties and the conservative parties on the Right – eschew any notion that:

(a) the Japanese government runs deficits but dispenses with the unnecessary practice of matching those deficits with debt-issuance. This is the pure Modern Monetary Theory (MMT) position.


(b) the Japanese government issues debt, which is then bought on secondary bond markets by the Bank of Japan.

I find this to be a very odd position for progressives to take.

Certainly, a person with an MMT understanding would realise that the first option is desirable and the second option has no fundamental negative consequences, but does allow the central bank to control bond yields (and prices).

We learned that the considered opinion is that the only politically acceptable option is that the government issues bonds to the non-government sector (currently via an auction process), where selected financial institutions are licensed to ‘make the market’, by placing bids for volume and price (yield), which then determines the overall yield on each bond issue.

Under this ‘politically acceptable’ option, we also learned that there is considerable disagreement as to what the central bank should do in this case.

I was asked by my Japanese friends to discuss two options from an MMT perspective:

(A) Should the central bank purchase these bonds in the secondary market which has the effect of transferring the interest return to the consolidated government sector and allows the central bank to control all yields and hold rates at zero if they desire?


(B) Should the central bank refrain from purchasing these bonds in the secondary market and leave the bond holders in the non-government sector to earn interest returns and principal payment on maturity?

It transpires that many progressives in Japan oppose Option A because they believe by creating bank reserves the policy approach plays into the hands of the so-called New Keynesian ‘reflationists’ (such as Paul Krugman) who were prominent in the ‘Great Stagnation’ debate in the late 1990s and early 2000s.

But the rival view is that, under Option (B), the central bank loses control of interest rates, and, ultimately, yields become market determined, which may ultimately lead to rising interest rates.

In this sense, many marginal firms who are just surviving in the present situation, would be adversely affected by interest rate changes, which would have the consequence of reducing investment and overall aggregate demand.

So the question really was about what might an MMT perspective bring to this debate?

In – Part 1 (December 3, 2019) – I dealt with the so-called New Keynesian ‘reflationists’.

These characters correctly understood that the in the period after the first consumption tax hike (May 1997), the Japanese economy went into a recession that lasted for six quarters (from December-quarter 1997 to the March-quarter 1999) and then struggled to resume growth for the rest of 1999.

This was the period that became known as the ‘Great Stagnation’ and attracted the attention of the ‘reflationists’ from within Japan and abroad.

The following graph shows quarterly real GDP growth from 1995 to the September 2019 (using Cabinet data) with the consumption tax hikes impacts shown in the red bars.

It was clearly a recession induced by poorly constructed fiscal policy. There was no need at all to increase the consumption tax. The Japanese government bowed to pressure from conservative economists who spun the story that it was running excessive deficits and building up too much debt, which would eventually create uncontrollable inflation, higher interest rates and bond yields, and ultimately, government insolvency.

All the usual fake narratives about currency-issuing governments.

The May 1997 consumption tax hike caused an almost immediate reaction in real private consumption expenditure, which fell by 0.66 per cent in the June-quarter 1997 – a substantial immediate response.

The decline in consumption expenditure growth resonated for several quarters.

The following graph shows the quarterly growth in real private consumption expenditure from the March-quarter 1995 to the March-quarter 2005.

Similarly, as would be expected, as the collapse in consumption expenditure created excess capacity, business investment also fell sharply as a generalised pessimism set in.

The following graph shows the quarterly growth in real private non-residential investment expenditure from the March-quarter 1995 to the March-quarter 2005.

The negative response was a lagged reaction to the downturn and investment spending didn’t recover as quickly because the renewed growth in late 1998 was accommodated by existing productive capacity.

So trying to suggest that the prolonged recession was due to a ‘mythical’ real interest rate being too high, because the inflation rate was too low relative to the near zero nominal interest rates (the ‘reflationists’ ‘liquidity trap’ fantasy) really missed the point.

And trying to suggest that if the Bank of Japan engaged in large-scale bond-buying in return for bank reserves would lift the inflation rate significantly – via the erroneous money multiplier and Quantity Theory of Money theories – was always going to fail.

The Modern Monetary Theory (MMT) economists made that point at the time and many times since.

The ‘reflationists’ were still trotting out these ridiculous ideas during the GFC.

I remind readers of the analysis one Paul Krugman made of the Japanese situation in May 1998 – Japan’s Trap – which echoed what he was also saying during the GFC and since.

He dramatically failed to understand the nature of the problem in Japan in 1998 and recommended a reliance on monetary policy.

In terms of his prescription he claims that his model was subject to “Ricardian equivalence, so that tax cuts have no effect”.

Further, he claims that government spending stimulus would have some impact in the immediate context but would “would be partly offset by a reduction in private consumption expenditures”.

To understand how ridiculous the notion of Ricardian equivalence is please read these blog posts (among others):

1. Ricardian agents (if there are any) steer clear of Australia (June 9, 2014).

2. Ricardians in UK have a wonderful Xmas (January 24, 2011).

3. Mainstream macroeconomics credibility went out the window years ago (October 2, 2017).

Krugman also said in 1997 that while fiscal policy stimulus might provide some marginal short-term growth, previous government spending:

… has been notoriously unproductive: bridges more or less to nowhere, airports few people use, etc … But there is a government fiscal constraint …

He went on to advocate the ‘reflationist’ strategy and claimed that that monetary policy had been ineffective because:

… private actors view its … [Bank of Japan] … actions as temporary, because they believe that the central bank is committed to price stability as a long-run goal. And that is why monetary policy is ineffective! Japan has been unable to get its economy moving precisely because the market regards the central bank as being responsible, and expects it to rein in the money supply if the price level starts to rise.

The way to make monetary policy effective, then, is for the central bank to credibly promise to be irresponsible – to make a persuasive case that it will permit inflation to occur, thereby producing the negative real interest rates the economy needs. This sounds funny as well as perverse … [but] … the only way to expand the economy is to reduce the real interest rate; and the only way to do that is to create expectations of inflation.

History tells us he was completely wrong in his diagnosis at the time as were all the ‘reflationists’.

The only thing that got Japan moving again was a renewed commitment to using fiscal policy to support growth.

and so it was no surprise that the QE they were urging the Bank of Japan to engage in as a means of lifting the inflation rate would fail

In his 2003 book – Balance Sheet Recession: Japan’s Struggle with Uncharted Economics and its Global Implications – Richard Koo wrote:

The reason why quantitative easing did not work in Japan is quite simple and has been frequently pointed out by BOJ officials and local market observers: there was no demand for funds in Japan’s private sector.

In order for funds supplied by the central bank to generate inflation, they must be borrowed and spent. That is the only way that money flows around the economy to increase demand. But during Japan’s long slump, businesses left with debt-ridden balance sheets after the bubble’s collapse were focused on restoring their financial health. Companies carrying excess debt refused to borrow even at zero interest rates. That is why neither zero interest rates nor quantitative easing were able to stimulate the economy for the next 15 years.

While I differ with Richard Koo on other issues, his analysis of the ‘Great Stagnation’ was correct and made Krugman and his fellow ‘reflationists’ look like fools.

Analysing the Options

So what does this all mean for how we should think about the central bank operations under the only ‘politically acceptable’ option that the Japanese government continue issuing debt.

The two options for the central bank in this situation are:

(A) Should the central bank purchase these bonds in the secondary market which has the effect of transferring the interest return to the consolidated government sector and allows the central bank to control all yields and hold rates at zero if they desire?


(B) Should the central bank refrain from purchasing these bonds in the secondary market and leave the bond holders in the non-government sector to earn interest returns and principal payment on maturity?

There is no MMT position on this.

What an MMT understanding provides is a framework for assessing the consequences of each choice, which would then reflect the social and political judgement of those consequences.

Option (A) is the current orthodoxy in Japan as is evidenced by the following graphs.

The first shows the Bank of Japan’s Balance Sheet assets from April 1998 to November 2019. The light blue area indicates the Bank’s holdings of outstanding Japanese government bonds (JGBs).

So the rather dramatic increase in the total assets held by the Bank is largely due to the various QE (bond buying) programs it has been pursuing over the last two decades.

The next graph shows the proportion of total outstanding JGBs held by the Bank of Japan from 1985 to September 2019.

The Bank currently holds 42.37 per cent of the total.

What these graphs (and the underlying data) tells us that the Bank of Japan’s strategy to buy JGBs in large volumes in order to, in their words, increase the inflation rate, has failed.

This demonstrates how ineffective monetary policy is in influencing the path of the inflation rate, despite the massive increase in central bank assets.

There is no relationship between the evolution of the monetary base (driven by the Bank’s purchases of JGBS in large volumes) and the evolution of the inflation rate.

The latest data on inflation expectations is also indicative that the QE policies are not having the desired effect.

The New Keynesian mainstream macroeconomics further suggests that prices are adjusted to accord with expected inflation. With rational expectations, the mainstream models predict that inflation will respond one-for-one with shifts in expected inflation.

The Bank of Japan has been trying to manipulate that ‘theoretical claim’ in real space through its QE experiments but has clearly not succeeded.

Please read my blog post – Japan still to slip in the sea under its central bank debt burden (November 22, 2018) – for more discussion on this point.

An MMT understanding provides us with an explanation of why this strategy (independent of fiscal policy) will be ineffective.

Income implications

What we know is that:

1. The QE strategy has been maintain long-term interest rates around zero. Why? In the hope that it will stimulate investment spending. But if the revenue-earning outlook is pessimistic, borrowers will not seek credit even at low interest rates. This is the point the ‘reflationists’ could not grasp.

2. The QE strategy has thus reduced income flows that would normally go to the non-government sector as a result of their bond holdings in the form of interest payments.

3. To offset that impact, central banks pay interest on excess reserves, to assist in maintaining the profitability of the financial institutions in question.

In Japan, there is a complex system known as the Complementary Deposit Facility – which provides a facility where the Bank of Japan can pay interest on excess reserve balances (above required reserves) for financial institutions that have current balances with the Bank.

However, since January 2016, when the QQE program drove interest rates negative, “excess reserves … have been divided into three tiers, to which a positive interest rate, a zero interest rate, and a negative interest rate are applied, respectively.”

The aim is to provide an incentive to banks carrying excess reserves to loan them to other financial institutions in need of reserves – ” as long as the rate exceeds the rate applied to the Policy-Rate Balances” (those that attract the negative interest rate).

The Bank says that “Rather than merely holding surplus funds in current accounts at the Bank, such transactions improve financial institutions’ profits.”

When the “Policy-Rate Balances increase as a whole … this exerts downward pressure on money market rates.” They increase, in part, as a result of the “Bank’s Japanese government bond purchasing operations”.

To protect “the profits of financial institutions”, the Bank makes adjustments to the benchmarks that determine when the negative interest rate (‘tax’) will cut in, “so as to avoid drastic changes in the Policy-Rate Balances”.

The most recent review was on September 19, 2019, see – Review of the Benchmark Ratio Used to Calculate the Macro Add-on Balance in Current Account Balances at the Bank of Japan – which increased the Benchmark Ratio to 37 per cent (from 36 per cent).

But, of course, the payment on excess reserves only flow to the financial institutions that have accounts with the Bank of Japan.

But, that aside, the payment of interest on excess reserves blurs the difference between Option (A) and Option (B).

The difference that remains is the possible capital gains on the assets held.

The outstanding JGBs not held by the Bank of Japan or other government agencies, are mostly held by various City Banks and Long-term Credit banks, Trust Banks, Regional Banks, and other financial institutions.

This graph (created from the Flow of Funds data available from the Bank of Japan) published in the – 2019 Debt Management Report – issued by the Ministry of Finance, shows the breakdown of JGB holders as of December 2018.

Now, ask yourself, why would these holders sell to the Bank of Japan?

Answer: because the demand from the QE programs push the price of the bonds up in the secondary market and create capital gains for the sellers.

The capital gain will reflect the maturity (principle) value of the bond plus the expected discounted flow of the interest payments that the holder would receive adjusted for inflation risk.

If there was a serious shortfall in the realisable capital gain relative to the principle/interest payments from holding to maturity, then why would a holder choose to sell – unless they had short-run liquidity issues that required emergency liquidation.

The point is that Option (A) and Option (B) may, in fact, not be very different in overall outcome.

1. Option (A) shifts liabilities to the non-government at the central bank from an account labelled ‘Outstanding JGBs’ to ‘Reserves’ and the income flows associated from ‘Interest payments on outstanding debt’ to ‘Interest payments on excess reserves’.

2. It also ensures that the secondary markets will be indifferent to selling the asset to the Bank at a price that reflects the return they would expect by holding the asset and earning interest until maturity (Option (B)).

Further, a progressive objection to Option (A) should not be motivated by the fact that the ‘reflationists’ suggested the strategy but rather that it doesn’t actually achieve its stated purposes.

Implications for liquidity management

Under Option (B), the government cedes control of yield determination at the regular JGB auctions to the private bond markets.

Option (A) allows the central bank to control all primary issue yields, indirectly, through influencing bond prices and yields in the secondary bond market.

At the limit, the central bank can set all rates along the yield curve (at all maturities) if it so chooses through QE-type purchases.

That control lapses under Option (B).

If yields are set in the private auction markets and then subject to speculative transactions in the secondary bond markets, then, clearly, there is the possibility that rates will rise over time.

The concern expressed in the original question (see Part 5a) is that this has the potential to damage marginal firms contemplating investment decisions.

While I considered the question of the sensitivity of investment spending in this blog post – Q&A Japan style – Part 1 (November 4, 2019) – and concluded there are solid arguments that can be made to suggest the sensitivity is low, it remains a possibility that such a negative impact would arise.

That concern does not apply under Option (A) because the yield curve always remains under the control of the central bank.

We should also distinguish between QE-type behaviour by the central bank and the more standard Open Market Operations (OMO), which, historically, have formed the basis of the liquidity management function of the central bank.

OMO involves the central bank buying and selling government bonds on the open market to manage bank reserves by influencing the price and yield of certain government bonds.

OMO is part of the strategy central banks use to ensure the short-term interbank rates (and subsequent longer maturity rates) are in line with the policy rate that it chooses.

OMO involves the central bank managing reserves by exchanging government securities for reserves (in either direction) with financial institutions that maintain accounts (current balances in the Japanese context).

The two arms of government (treasury and central bank) have an impact on the stock of accumulated financial assets in the non-government sector and the composition of the assets.

The government deficit (treasury operation) determines the cumulative stock of financial assets in the private sector, whereas, central bank decisions then determine the composition of this stock in terms of notes and coins (cash), bank reserves (clearing balances) and government bonds.

Money markets are where commercial banks (and other intermediaries) trade short-term financial instruments between themselves in order to meet reserve requirements or otherwise gain funds for commercial purposes.

All these transactions net to zero. At the end of each day commercial banks have to appraise the status of their reserve accounts.

Those that are in deficit can borrow the required funds from the central bank, usually at a penalty rate.

Alternatively banks with excess reserves are faced with earning nothing or some support rate on these excess reserves if they do nothing.

Clearly it is profitable for banks with excess funds to offload those reserves via loans to banks with deficits at market rates. Transactions in the interbank market necessarily net to zero and cannot clear the system-wide surplus.

Competition between banks with excess reserves for custom puts downward pressure on the short-term interest rate (overnight funds rate) and depending on the state of overall liquidity may drive the interbank rate down below the operational target interest rate.

When the competitive pressures in the overnight funds market drives the interbank rate below the desired target rate, the central bank drains the excess liquidity by selling government debt.

This is a different motivation to that used to justify QE, which broadens the scope of the standard OMO to more comprehensively control yields and bond prices.

When the government runs a deficit that is matched by bond-issuance, the non-government sector swap reserves for the bonds.

If the deficit spending then stimulates further excess reserves, then the central bank has to drain them or pay the support rate if it is to maintain control of its monetary policy target.

In the case of Japan, the Bank of Japan has effectively maintained zero short-term rates aligned with its policy rate by not draining all excess reserves.

Option (A) is an extreme version of this. Option (B) is not incommensurate with the Bank of Japan maintaining the tools necessary to manage bank reserves.

Some might raise concerns under Option (A) about the Bank of Japan incurring capital losses should yields subsequently rise while they have massive JGB holdings.

Those who do not understand the concept of a currency-issuer cannot also understand why negative capital for a currency-using business is problematic but of no application or relevance to a central bank.

Please read my blog post – The ECB cannot go broke – get over it (May 11, 2012) – for more discussion on this point.


My preference is clearly for the government not to issue debt to match any deficit spending. It is unnecessary and amounts to corporate welfare.

But, when we introduce real world layers (politics, etc) we realise that some pure MMT-type options are not possible.

This question introduces just such a case in Japan.

Given the political constraints, we are asked to choose between two options for central bank conduct, when the government does issue debt.

(A) Buy it all up in the secondary bond markets.

(B) Leave it in the non-government sector.

My preference is for Option (A) because I also have a preference for zero short-term interest rates and Option (B) makes that aspiration difficult to manage.

But, equally, I resent handing out capital gains to bond holders (which makes the corporate welfare even more advantageous) and absorbs the risk of holding the bonds within the government sector.

That is enough for today!

(c) Copyright 2019 William Mitchell. All Rights Reserved.

Q&A Japan style – Part 5a

Published by Anonymous (not verified) on Tue, 03/12/2019 - 6:52pm in


Japan, Q&A

This is a discussion about Modern Monetary Theory (MMT) and the bond-issuing options for a currency-issuing government such as Japan and Australia. We will consider the three options that such a government has and discuss each from an MMT perspective. What an MMT understanding allows is a thorough appreciation of the consequences of each option. The conclusions we reach are quite different from those presented in mainstream macroeconomics, mostly due to the fact that we do not consider the bonds to be necessary to fund government spending beyond tax revenue and construct the operations of the central bank and the commercial banks to accord to the way they operate in reality rather than in the fictional world of the mainstream. This discussion also recognises the political dimensions of government rather than the technical way we often consider things in MMT. This is the first-part of a two-part answer which I will conclude on Thursday. Today, we consider the emergence of the so-called ‘reflationists’ in Japan who advocated large-scale, non-standard monetary policy in the late 1990s as a solution to the ‘Great Stagnation’ that had beset the Japanese economy.

There are three main options facing a government in relation to bond-issuance:

1. It can recognise its currency-issuing capacity, which among other things, makes the necessity to ‘fund’ deficits redundant. This leads to an exploration of what other purposes such debt-issuance might serve and the conclusion is that there is no useful purpose, in terms of advancing the well-being of the overwhelming majority of the citizens, of continued issuance.

2. The government can issue bonds to the central bank as an accounting match for the central bank then crediting bank accounts to facilitate government deficit spending. In this option, the central bank accumulates the government debt receives interest payments from the treasury side of government. In a consolidated government accounting, the liabilities and assets, thus net to zero.

3. The government issues bonds under one system or another to the non-government sector. In the current period, this is usually done via an auction process, where selected financial institutions are licensed to ‘make the market’, by placing bids for volume and price (yield), which then determines the overall yield on each bond issue.

These options then led to the following question from a Japanese professor that is worth answering because it involves a number of interesting aspects that will help you achieve an MMT understanding.


In Japan, the political consensus is that Option 3 is preferred. This is a position taken by both the progressive Left parties and the conservative parties on the Right, largely as a result of them being seduced by the mainstream myths about debt.

However, there is disagreement about what the central bank should do in this case.

(A) Should the central bank purchase these bonds in the secondary market which has the effect of transferring the interest return to the consolidated government sector and allows the central bank to control all yields and hold rates at zero if they desire?


(B) Should the central bank refrain from purchasing these bonds in the secondary market and leave the bond holders in the non-government sector to earn interest returns and principal payment on maturity?

Many progressives in Japan oppose Option A because they believe by creating bank reserves the policy approach plays into the hands of the so-called New Keynesian ‘reflationists’ who were prominent in the ‘Great Stagnation’ debate in the late 1990s and early 2000s.

However, a rival view is that under Option (B), the central bank loses control of interest rates, and, ultimately, yields become market determined, which may ultimately lead to rising interest rates.

In this sense, many marginal firms who are just surviving in the present situation, would be adversely affected by interest rate changes, which would have the consequence of reducing investment and overall aggregate demand.

The other observation is that there is recognition that under Option (A), the price of bonds rises (because of the central bank demand pressure in the secondary market), and the bond holders enjoy capital gains, which would reflect the discounted sum of the expected future interest returns.

So the central bank purchases of the debt in the secondary market imply an interest return anyway and an equivalence with Option (B) in this respect.

What does MMT say about this debate?

Given the political reality in Japan that the government must continue to issue bonds to the non-government sector to match its fiscal deficits, would the intrinsic MMT position be to prefer Option (A) rather than Option (B) and maintain a zero interest rate environment?

The New Keynesian ‘Reflationists’ and Japan

The first thing is to understood the meaning of the term ‘reflationist’ in the Japanese context.

In the period after the massive commercial property crash in Japan in the early 1990s, Japan returned to growth under the support of fiscal deficits.

However, the 1990s also saw a period of subdued price movements, with the wholesale price index starting to decline in 1994, followed by a simular fall in the CPI in 1997.

Then, under pressure from conservatives, the Japanese government introduced a consumption tax in May 1997, which caused a slump in economic activity and a period of sustained economic malaise, which has become known as the ‘Great Stagnation’.

The discussion in Japan at the time was focused on countering deflation.

This discussion was conditioned by the experience of Japan during the transition from the Bretton Woods system when the then Minister for Trade and Industry, Yasuhiro Nakasone, advocated using policy to increase the rate of inflation in order to offset the appreciation of the yen, as the currency broke with the peg.

There was a vigorous debate over this in Japan in early 1972, which is documented in the excellent book by the now Deputy Governor of the Bank of Japan, Masazumi Wakatabe – Japan’s Great Stagnation and Abenomics: Lessons for the World (Palgrave Macmillan, 2015).

The Endnotes for the book provide further information:

16. Nakasone suggested it on August 9, 1972. “Yen Saikirisage wo Fusegu tame ni wa Chosei Infure mo” (We may need adjustment inflation to prevent yen’s reap- preciation) Asahi Shimbun, Tokyo, August 10, 1972, 9).

17. The Asahi Shimbun quickly criticized Nakasone’s “Chosei Infure Ron” in its edito- rial titled “Chosei Infure Yonin Ron ni Hantaisuru” (We oppose the adjustment inflation argument) (Asahi Shimbun, Tokyo, August 13, 1972, 5).

The policy, labelled “Chosei Infure Ron (adjustment inflation argument”, resonates whenever reflationary strategies are raised.

Many economists tried to disabuse Japanese policy makers from using expansionary macroeconomic policies, and, instead advocated “deregulation and other structural reform measures” to combat deflation.

The typical neoliberal approach.

Masazumi Wakatabe notes that the deflation debate was really the “first gloablized economic debate for Japan” because it “attracted a considerable amount of attention from abroad”.

While many non-Japanese economists entered the debate, Masazumi Wakatabe considers “The most powerful argument for reflation came from Paul Krugman”, who argued against central banks “aiming for zero inflation”.

So, it was the more moderate New Keynesians that entered the fray as the ‘reflationists’.

In the early 1990s, as the inflation era arising from the OPEC oil crises came to an end (largely due to the 1991 recession), many economists advocated central banks adopting zero inflation targets.

In 1996, Krugman argued that Japan should “adopt as a long-run target fairly low but not zero inflation, say 3-4%”.

His (flawed) logic was that markets desire the capacity to run inflation ahead of nominal wages growth (to cut real wages) and an inflation rate of zero would make this impossible, given the downward rigidity in nominal wages.

Krugman basically claimed that with zero nominal interest rates, if there are deflationary expectations, the real interest rate (difference between the nominal interest rate and the rate of inflation) would remain too high to stimulate investment and end the stagnation.

This is Krugman’s so-called ‘liquidity trap’ argument, which supports his contention that pushing inflationary expectations up with macroeconomic stimulus, will drop the real interest rate towards its full employment level.

Krugman also claimed that QE-type bond purchases would help stimulate the desired inflation.

This is clearly a loanable funds type of argument (the real interest rate issue) with Quantity Theory overtones (the inflation from QE).

It is erroneous and I will come back to that soon.

As Masazumi Wakatabe notes, Krugman was railing against those who considered the ‘Great Stagnation’ to be the result of supply-side factors which needed further deregulation and structural shifts to cure.

His argument, even though it was established on spurious grounds (real interest rates etc), was that:

Japan’s problem was a macroeconomic demand shortage, so the necessary remedy was expansionary macroeconomic policy.

Krugman was joined by a host of New Keynesian economists, including Lars Svensson and Ben Bernanke, in advocating expansionary policies based on driving the inflation rate up.

They were called the “reflationists”.

At the time, this argument was strongly opposed by leading Keynesian economists in Japan (for example, Hiroshi Yoshikawa, a professor at Tokyo University).

His point was:

1. The problem was a lack of effective demand (a la Keynes).

2. Expansionary policy will not work because there is “demand saturation”.

3. Only creating new markets with new goods previously unavailable will spur new spending by households and firms.

4. Krugman’s arguments were based on flawed New Keynesian analysis – loanable funds and Quantity Theory – which Keynes had firmly debunked in the 1930s.

As Masazumi Wakatabe notes, Professor Yoshikawa nonetheless, did support fiscal expansion in the late 1990s, after the meltdown caused by the consumption tax hike in 1997.

The representation of the Japanese problem as a ‘liquidity trap’ by the ‘reflationists’ was spurious and not reflective of the insights of Keynes who analysed the liquidity trap phenomenon in the 1930s.

I wrote about that issue in these blog posts (among others):

1. Whether there is a liquidity trap or not is irrelevant (July 6, 2011).

2. The on-going crisis has nothing to do with a supposed liquidity trap (June 28, 2012).

But, moreover, the New Keynesian or ‘reflationist’ causality, which motivated the likes of Krugman et al. was deeply flawed.

I touched on the problems with the narrative in this blog post – Q&A Japan style – Part 1 (November 4, 2019).

The relevant summary points:

1. The reflationists believed that monetary policy could cause a reflation in Japan because they believe in the validity of the Classical loanable funds doctrine, the Wiskellian real interest rate link, and the Quantity Theory of Money to understand the inflationary process.

None of these concepts, theories are valid in a modern monetary economy and were categorically debunked by Keynes and others in the 1930s and beyond.

2. The natural rate of interest is a central concept in the Loanable Funds theory, where the loanable funds market brought savers together with investors, the natural rate of interest is that rate where the real demand for investment funds equals the real supply of savings.

This remains a core concept in New Keynesian macroeconomics.

Accordingly, when the money interest rate is below the natural rate, investment exceeds saving and aggregate demand exceeds aggregate supply. Bank loans (shifting the savings to investors) create new money to finance the investment gap and inflation results (and vice versa, for money interest rates above the natural rate).

The orthodox position is that the interest rate somehow balances investment and saving and that investment requires a prior pool of saving are both incorrect.

In the modern sense, the New Keynesians construct the narrative in this way – the central bank controls the nominal interest rate by managing bank reserves and the interbank market.

They manipulate the interest rate to target a given inflation rate which then allows them to influence the real interest rate, which is determined outside of the monetary system in the loanable funds market, which mediates saving and investment preferences, which are, in turn, reflective of factors such as productivity and preference for future consumption over current consumption.

If those preferences and real forces are stable, the natural interest rate will be stable. So, the policy regime then tries to target an inflation rate via a nominal interest rate setting that will deliver the appropriate natural rate of interest.

Given the same approach contends that fiscal policy expansion will put upward pressure on interest rates (‘crowding out’), it is considered a destabilising force and eschewed.

The reality is that investment brings forth its own saving through income adjustments.

Saving is a monetary variable dependent on income.

Further, banks will extend loans to any credit worthy customer and are not constrained by the available saving.

Loans create deposits, which, if spent, will stimulate income and saving as a residual after consumption. There is no financial crowding out arising from increased fiscal deficits.

3. The ‘reflationists’ believed that if the Bank of Japan expanded bank reserves through massive bond buying campaigns, this would increase the capacity of the banks to extend loans, which would stimulate economic growth and drive up the inflation rate.

They considered the increased central bank money (bank reserves) would multiply into increased broad money growth and via the Quantity Theory of Money, would drive the inflation rate up.

As expectations of inflation rose, this would start to drive the inflation rate up independently.

A rising inflation rate at low nominal interest rates would drive down the real interest rate, which according to the loanable funds model would stimulate investment and the economy in general.

As above, the supply-side model of banking, where reserves are built up before loans are made, is not representative of reality. It is one of the fictions of the mainstream monetary theory.

Further, the idea of the money multiplier is erroneous.

In the real world, as banks extend credit to borrowers and loans create deposits, the central bank is obliged, as part of its charter to preserve financial stability, to ensure there are sufficient bank reserves to guarantee the integrity of the payments system.

So the reserves adjust to the broad aggregates not the other way around.

The reality is that the central bank does not have the capacity to control the money supply.

The banks then ensure that their reserve positions are legally compliant as a separate process knowing that they can always get the reserves from the central bank.

The only way that the central bank can influence credit creation in this setting is via the price of the reserves it provides on demand to the commercial banks.

What the ‘reflationists’ failed to understand (and still get it wrong) is that quantitative easing involves the central bank engaging in an asset swap (reserves for financial assets) with the private sector.

The net financial assets in the private sector are in fact unchanged although the portfolio composition of those assets is altered (maturity substitution) which changes yields and returns.

This might increase aggregate demand given the cost of investment funds is likely to drop. But on the other hand, the lower rates reduce the interest-income of savers who will reduce consumption (demand) accordingly.

How these opposing effects balance out is unclear but the evidence suggests there is not very much impact at all.

For the monetary aggregates (outside of base money) to increase, the banks would then have to increase their lending and create deposits. This is at the heart of the mainstream belief is that quantitative easing will stimulate the economy sufficiently to put a brake on the downward spiral of lost production and the increasing unemployment. The recent experience (and that of Japan in 2001) showed that quantitative easing does not succeed in doing this.

Should we be surprised. Definitely not. The mainstream view is based on the erroneous belief that the banks need reserves before they can lend and that quantitative easing provides those reserves. That is a major misrepresentation of the way the banking system actually operates. But the mainstream position asserts (wrongly) that banks only lend if they have prior reserves.

Building bank reserves does not increase the bank’s capacity to lend. Loans create deposits which generate reserves. Bank lending is not ‘reserve constrained’.

Please read my blog posts for more detailed discussion:

1. Money multiplier – missing feared dead (July 16, 2010).

2. Money multiplier and other myths (April 21, 2009).

3. Bank of England finally catches on – mainstream monetary theory is erroneous (June 1, 2015).

In turn, this failing means that the invocation of the Quantity Theory of Money is spurious.

The Quantity Theory of Money which in symbols is MV = PQ but means that the money stock times the turnover per period (V) is equal to the price level (P) times real output (Q). The mainstream assume that V is fixed (despite empirically it moving all over the place) and Q is always at full employment as a result of market adjustments.

In general, to operationalise this identity and create a causal link between M -> P, requires one to assume that V and Q fixed – which in turn, implies the economy is always at full employment (the neoclassical economists assumed that flexible prices would sustain this state).

Under those assumptions, changes in M cause changes in P – which is the basic ‘reflationist’ claim that expanding the money supply is inflationary. They say that excess monetary growth creates a situation where too much money is chasing too few goods and the only adjustment that is possible is nominal (that is, inflation).

Keynes departed from his Marshallian (Quantity Theory) roots by observing price level changes independent of monetary supply movements (and vice versa) which changed his own perception of the way the monetary system operated.

Further, with high rates of capacity and labour underutilisation at various times one can hardly seriously maintain the view that Q is fixed. There is always scope for real adjustments (that is, increasing output) to match nominal growth in aggregate demand. So if increased credit became available and borrowers used the deposits that were created by the loans to purchase goods and services, it is likely that firms with excess capacity will respond by increasing output rather than prices.

The reason that the commercial banks were reluctant to lend much during the late 1990s in Japan was because the potential borrowers had become risk averse and were not presenting themselves to the banks.

It had nothing to do with a lack of ‘reserves’. Adding more reserves by quantitative easing was never going to alter the pessimistic outlook.

The ‘reflationists’ were correct in suggesting the Great Stagnation was a demand-side problem, which any amount of structural changes (wage cuts, cutting job protection, privatisation, welfare cuts, etc) would not be able to solve.

But they were wrong to believe it had something to do with a real interest rate being too high.

Their belief that non-standard monetary policy (QE, etc) was necessary because the nominal rate had hit zero or thereabouts was also flawed.

Other relevant blog posts that provide more detail are:

1. Investment and interest rates (August 10, 2012).

2. The natural rate of interest is zero! (August 30, 2009).

3. Why investment expenditure is insensitive to monetary policy (June 22, 2015).

4. Monetary policy is largely ineffective (April 8, 2015).

5. Building bank reserves is not inflationary (December 14, 2009).

6. Printing money does not cause inflation (March 17, 2011).

7. Modern monetary theory and inflation – Part 1 (July 7, 2010).

8. Modern monetary theory and inflation – Part 1 (January 6, 2011).


The point is that no MMT economist would support the sort of narrative that the ‘reflationists’ applied during the late 1990s in Japan.

It was clearly spurious and when applied, failed to achieve its stated purpose for reasons discussed above.

However, we do not have surrender to the ‘reflationist’ vision or causality to see the value of Option (A), in the politically constrained environment in Japan.

On Thursday, I will relate this knowledge to the specific question under investigation and further explain that last statement.

That is enough for today!

(c) Copyright 2019 William Mitchell. All Rights Reserved.

Interview with Asahi Shimbun in Tokyo – November 6, 2019

Published by Anonymous (not verified) on Mon, 25/11/2019 - 1:06pm in


Inflation, Japan

During my recent trip to Japan, where I made several presentations to various groups, including a large gathering in the Japanese Diet (Parliament), I received a lot of press interest, which is a good sign. I am slowly putting together the translated versions of some of the print media articles. Today, I provide a translation (with my annotations) of an interview I did with the centre-left newspaper – Asahi Shimbun – on November 6, 2019 in Tokyo. This is a daily newspaper and is one of the largest of five national newspapers in Japan. It has an interesting historical past but that is not the topic of the blog post today. The article opened with a statement introducing Modern Monetary Theory (MMT) and then followed a Q&A format. I have expanded the answers reported in the paper to reflect the actual answers I gave to the two journalists during the interview and to a wider press gathering at an official press conference the day before in Tokyo.

The article (November 20, 2019) – 消費増税「信じがたい」 異端「MMT」の名付け親語る (“Consumption tax hike ‘It’s hard to believe’) – records the conversation I had with the two journalists, Tetsuya Kasai and Kazuo Teranishi, at the Japanese Parliament on November 6, 2019.

This was the day after my formal presentation to the Diet. The face-to-face interview lasted about an hour and was in English.

The article also uses material from the main press conference on November 5, 2019, which followed the formal presentation. The open press conference also lasted about an hour but was interpreted.

I am also just reporting the English-translation, rather than the original Japanese version, but you can check it against the article linked above if you can read Japanese.

The photos were published in the Asahi article and came from the interview (November 6, 2019) and the press conference (where I am wearing translation earphones) (November 5, 2019). The photo effects (colouring etc) were their doing.

The article opened with a statement introducing Modern Monetary Theory (MMT).

Countries that can issue government bonds in their own currency, such as Japan and the United States, will not face the need to default, so they should expand their net public spending to increase their income growth and employment if they have real resources available.

Inflation can also be controlled through a range of policy levers.

Modern Monetary Theory (MMT) is a theory that is considered to be heretical by the mainstream macroeconomics. But interest in MMT has grown in many countries as the reliance on moentary policy to stimulate growth has failed and central bank governors are calling for a change in policy emphasis.

The former President of the European Central Bank (ECB), Mario Draghi, who recently retired, said, that policy makers should be open to MMT.

So, why should we be considering MMT now?

We asked Professor Bill Mitchell from Newcastle University in Australia, who is one of the original developers of MMT and who is visiting Japan at the moment, for his view on the growing popularity of MMT.


Why do you think MMT is attracting attention now?


Mainstream macroeconomics advocates an economic policy which relies on monetary policy to stabilise growth and prevent recessions.

The problem is that it has reached a point where almost everyone can see that it has not been able to answer the challenges it has set itself. In many countries, real wages have fallen and/or nominal wages growth has been flat.

Inflation is low despite the massive injections of bank reserves via QE and negative interest rates in various nations.

We are starting to reach a consensus that the way we are organising our socio-economic system is invoking damaging climate change, which will have to be addressed with a massive transformation in the way we produce and consume, which, in turn, will require a substantially greater role for government intervention and fiscal policy.

When governments engage in war, they spend a lot of money on the military. During the global financial crisis, even though the banks had behaved in an irresponsible and often criminal manner, the governments bailed them out immediately with vast sums to prevent a financial collapse.

We didn’t ask then: Where is the money coming from? We instinctively knew it came from the currency-issuer, the government.

But, when the government is pressured to allocate spending to improve the lives of the socially vulnerable, the unemployed or the poor, or to provide outlays to protect our environment, the first question that is asked is ‘where is the money coming from’.

And that question is often asked by conservative interests that, in one way or another, benefit from military expenditure or financial bailouts.

But the issue that is highlighted is this: Why can the government use its currency to benefit the military or the financial sector but cannot use it to build and maintain first-class public infrastructure?

Once we see the hypocrisy in that dichotomy, then we can move on to understand that the currency-issuing government is not financially constrained at all. Rather, it is constrained by real resources, and, ultimately, by what the natural environment can sustain in terms of economic activity and consumption.

And that revelation, at the heart of MMT, opens up the policy debate in ways we have not considered, while operating in the mainstream austerity-bias environment.

There is a growing understanding now, that fiscal policy has to dominate into the future.

And the only economists who were unambiguously advocating that position when it was not popular, were the MMT economists.


The former ECB President Draghi has recently started talking about the need for fiscal policy. At the recent G20 meeting, at meetings of Finance Ministers and Central Bank Governors, there is an opinion that monetary policy has reached its limit, and that if the global economy is susceptible to recession in the future, then fiscal policy will have to become more important.

What is your view on that?


In his farewell speech to mark his retirement, Mario Draghi indicated that monetary policy has reached its limits.

He also said that policy makers should be open “to ideas such as Modern Monetary Theory (MMT)”.

He said “These are objectively pretty new ideas … They have not been discussed by the Governing Council. We should look at them”.

In Australia, the RBA governor Philip Lowe has also almost begged the federal government to introduce fiscal stimulus given our economy is heading towards recession and unemployment is rising.

Now, the central bank governors around the world appear to be ‘singing off the same sheet’.

In other words, the promise that mainstream economists held out about the capacity of monetary policy to deliver benefits can no longer be sustained.

A reliance on monetary policy cannot be supported.

I think this is the beginning of a new era of fiscal policy dominance.


But, if you expand government deficits and increase the issuance of government bonds, won’t it lead to a rise in interest rates, and isn’t that a negative for economic growth?


That logic is just repeating the standard mainstream economics myths.

If the propositions were true, then there should have been a financial crisis in Japan by now, given the fiscal policy settings of the government.

For nearly 30 years, Japan has been running substantial fiscal deficits, it now has the world’s largest gross public debt ratio and the central bank now holds around 45 per cent of the outstanding government bonds.

No fiscal crisis has occurred.

Even the yields on 10-year government bonds have been negative recently.

The point is that there is not a finite pool of savings that the government competes with private investors over. Further, the private banks will always make loans to credit-worthy private borrowers. Loans create deposits or liquidity. There is no hard constraint operating.

And, ultimately, those deposits have transactional veracity, because the Bank of Japan will always ensure there are sufficient reserves in the banking system to allow the payments system to function effectively.

So there is no reason interest rates will rise in the future as a result of the ongoing deficits.

The danger of rising government bond yields will not be realized in Japan in the foreseeable future.

That means that the Japanese government should continue to have a relatively large fiscal deficit into the future to satisfy the saving preferences of the non-government sector and ensure there is full employment and first-class infrastructure to meet the challenges of the ageing society and the climate crisis.


What is the role of the central bank?


In MMT’s view, the central bank’s job is to set a policy interest rate and leave it as it is. Zero is zero, 2 per cent is 2 per cent. It’s just a matter of setting the policy rate and leaving it at that.

We prefer a zero interest rate, given that this is the level the system will move to if the government is running continuous deficits and the central bank doesn’t conduct open market operations or set a support rate on excess reserves.

The MMT economists consider monetary policy to be an ineffective policy tool for counter-stabilisation purposes – to adjust economic activity.

Its impact is unpredictable because it relies, in an indirect fashion, on differential distributional impacts of interest rates changes (on lenders and borrowers) which are hard to assess in any reliable manner.

We have also seen that the various QE (quantitative easing) measures taken by central banks over the last few decades have not succeeded in meeting their aims – which has been to increase the inflation rate.

Mainstream economists thought that if QE increased reserves in the system (through the asset-swap – bonds for reserves), then banks would increase loans and economic activity would rise.

But this ‘supply-side’ view of banking is wrong. Banks do not loan out their reserves to the retail market. Their lending is not reserve constrained. The reason that borrowing was weak after the GFC was because firms were uncertain of the future returns on new productive capacity and households became more risk-averse given the elevated risk of unemployment.

Fiscal policy is a direct form of spending intervention and more predictable in its impacts.

Further, the idea that the central bank should be independent from the political process is a myth. There are many reasons why central banks can never been independent from the Treasury functions of government.

Governments appoint the senior officials at the central bank.

But more importantly, the officials from the central bank and treasury (or Ministry of Finance in Japan’s case) have to meet regularly (daily) to ensure the impacts of fiscal policy on the liquidity are commensurate with the bank’s own policy operations.

There is a high level of coordination between the two arms of ‘government’ in all our countries.

The myth of central bank independence just plays in to the neoliberal trend towards depoliticisation of macroeconomic policy, where the elected government can divert the negative publicity associated with harsh economic policies by claiming the ‘central bank’ did it, not us!


I can sympathize with the idea of ​​spending money on healthcare, education, and public infrastructure, but I think there are risks in the MMT concept. If the government increases the budget deficit, how will the financial market react? What will you do if inflation begins to rise? Who will take responsibility at all?


Why will inflation begin to rise? It hasn’t increased in Japan for 20 years ….

Question (interjection):

It has only been 20 years. No one knows when it will go up.

Answer (continues):

If you understand the inflationary process then you will conclude, as I do, that inflation will not accelerate in Japan in the foreseeable future.

20 years is a very long period. If the predictions of the mainstream economists had any veracity then we would have seen inflationary forces before now in Japan, given the scale of the fiscal intervention and the way the Bank of Japan has operated.

It is easy to pose, in the abstract, the “No one knows when it will go up”.

Eventually, if inflation was to accelerate, then the mainstream will say they were correct all along. But that would be a false conclusion. The causality that the mainstream suggest – that fiscal deficits and the Bank of Japan purchases of government bonds are pumping ‘too much’ yen into the economy which will cause inflation because there is too much money chasing too few goods is patently false.

If that was true, then nominal GDP growth should be high. It is not and hasn’t been.

But, moreover, we should understand what government debt is in the first place?

Who holds the government debt?

We do. Pension funds and investment funds hold it. It is one of the components of our financial wealth.

And the government’s so-called interest burden is, in fact, a component of our income flow.

Why do you think that increasing our wealth or income is a bad thing?

The government’s public debt is our financial asset and allows us to hold our stock of wealth in risk-free financial asset.


Isn’t it necessary to balance the fiscal balance? Will future generations be forced to pay the cost of the deficits the government runs now?

No, the future generations never have to repay past deficits.

When I was younger, the Australian government built up a large debt as a result of running deficits as part of the post-WW2 nation building exercise.

I didn’t repay it once I started working.

Rather, I benefited from the excellent education system that the government created when I was younger. My parents were poor and if I hadn’t had access to excellent public education and welfare support, I wouldn’t have been able to reach the position I am in now.

The deficits in the past stimulated social mobility in Australia and allowed children born into working class families to escape that poverty and gain material security through education.

In what sense, then have my generation paid back the deficits?

But, also, when considering what the appropriate fiscal position of the government should be, we have to consider the context, and by that I mean the relevant goals of government and the state of non-government spending and saving desires.

A fiscal deficit, in itself, is neither good nor bad. The only way we can make sense of the appropriateness of the fiscal position is to juxtapose it against the state of the economy and the aspirations of the non-government sector, as expressed through its spending behaviour.

What I mean by that is that the government should always take responsibility to achieve full employment as a starting position.

We know that spending equals income and output, which in turn generates employment. At any point in time, there is one level of spending that will create enough demand to fully employ the available productive resources, given productivity levels.

If the non-government sector’s spending is insufficient to generate that particular level of spending, then the economy will not achieve full employment unless the government sector fills the spending deficiency.

So if the non-government sector desires to save overall and implements a strategy aimed at achieving that goal, then the government sector will typically have to run fiscal deficits on a continuous basis to maintain its goal of full employment.

It’s highly unlikely that a fiscal balance, where government spending exactly equals tax revenue, will correspond to a overall spending level that maintains full employment.

In the case of a nation such as Norway, which generates a lot of spending from its external sector, the North Sea energy resources, the government may be forced to run a fiscal surplus to avoid pushing too much spending into the economy. But that situation is rare.

So before we can say that a 2 per cent of GDP deficit is appropriate, or, a 4 per cent deficit is appropriate, or even a 2 per cent surplus is appropriate, we have to understand the context and the position of the economy in relation to achieving full capacity.


The Japanese government raised the consumption tax rate to 10% from October this year. On the other hand, there are political parties advocating tax cuts and abolition of consumption tax.

What is your view on this debate?


History tells us that over the last three decades, when Japan has used fiscal stimulus to maintain growth and keep unemployment low, the government has eventually come under pressure from mainstream economists to reduce the deficit because the mainstream claim that accelerating inflation and rising interest rates are likely to occur.

The more extreme versions of these fear campaigns have predicted that the government will face insolvency.

Unfortunately, the government has succumbed to this fear mongering and, at various times, imposed austerity measures, which have halted the growth rate and pushed-up unemployment.

For example, a recession occurred after the first consumption tax hike in April 1997.

Anybody who understood economics would have predicted that the growth cycle would end once the impacts of the consumption tax hike were felt. It was obvious that household consumption expenditure would be adversely affected and that’s exactly what happened.

It took some years and a renewed fiscal stimulus to get growth back on track in Japan.

The same sort of pressure occurred in 2014, when the government further increased the consumption tax level, and, again this caused a dramatic decline in household consumption spending and the inevitable move into recession.

The attacks on government fiscal policy, which have formed the basis of these ill-conceived austerity policies, have no basis in reality.

The Japanese government never faces insolvency and is operating in environment where continuous fiscal deficits are necessary to maintain low unemployment in the face of high non-government sector saving.

And so the decision to further increase the consumption tax in October of this year, well, I can only say that the Japanese government is doing something that is incredible.

Incredible in the sense that it has no credibility.

The Japanese government is clearly aware that its recent consumption tax hike will damage spending, which is why, this time, it provided some short-term offsets, but eventually the negative consequences will be revealed.

There is no economic case that can be made for the consumption tax hike and I fully support the political groups, on both the Conservative and the progressive side of politics in Japan, that oppose this austerity.


Thanks to the interview team for an interesting time.

But, as you can see, even the centre-left media elements in Japan, have mainstream-type questions as the focus. The neo-liberal mindset is difficult to penetrate even among progressive forces.

Thanks to Akiko (😙) for the Japanese text (it was behind a paywall).

That is enough for today!

(c) Copyright 2019 William Mitchell. All Rights Reserved.

Q&A Japan style – Part 4

Published by Anonymous (not verified) on Mon, 11/11/2019 - 6:27pm in


Japan, Q&A

This is the final part of my four-part Q&A series arising from my recent trip to Japan. In this post, I answer just one question. The answer goes to the heart of the relationship between the national government (finance division) and the central bank and illustrates the complexity of reserve accounting. So it needs some background by way of education. Recall that these questions about Modern Monetary Theory (MMT) were raised with me during my recent trip to Japan. The public discussion about MMT in Japan is relatively advanced (compared to elsewhere). Political activists across the political spectrum are discussing and promoting MMT as a major way of expressing their opposition to fiscal austerity in Japan. The basics of MMT are now as well understood in Japan as anywhere and so the debate has moved onto more detailed queries, particularly with regard to policy applications. So as part of my current visit to Japan, I was asked to provide some guidance on a range of issues. In my presentations I addressed these matters. But I thought it would be productive to provide some written analysis so that everyone can advance their MMT understanding.

The previous parts of this series are:

1. Q&A Japan style – Part 1 (November 4, 2019).

1. Q&A Japan style – Part 2 (November 5, 2019).

1. Q&A Japan style – Part 3 (November 6, 2019).


We need some prior understanding before we get to the Answer.

Some people get initially confused when they confront Modern Monetary Theory (MMT) for the first time and are introduced to the heuristics we use to describe the intrinsic capacities of a currency-issuing government in a fiat monetary system.

So MMT educators start with the proposition that a sovereign government is never revenue constrained because it is the monopoly issuer of the currency.

That means that it has to spend the currency into existence before the non-government sector can do anything with it, including paying taxes.

But that simple first step encounters problems when people start applying their own conception of how they think such a government operates, which immediately creates dissonance.

In the context of this question, people have been told forever that governments that spend beyond their tax revenue have to borrow funds from the non-government sector to cover the shortfall, even though, they intuitively know that it is the government that is the issuer of the money it borrows.

The ‘printing money’ taboo is so strong that they never really question the logic of the bond-issuance and the monetary operations that support it.

For an MMT educator, the challenge then is to somehow marry this dissonance with the simple heuristics as a starting point to further elucidation.

As I indicated in – Q&A Japan style – Part 1 (November 4, 2019) – in the real world, there are institutional layers that complicate matters and often lead to people doubting the veracity of MMT insights.

In that blog post, I mentioned the simple MMT claim that governments have to spend first in order for the non-government sector to pay their taxes. As a starting point, that statement provides elementary insights.

But, of course, once we layer the analysis and allow private banks, for example, to create credit, then it follows that I can still pay my taxes with cash borrowed from the bank, quite apart from government spending. At that point, the analysis becomes more complicated because we have to trace through multiple transactions before we can see the essence.

In that specific case, a deeper understanding is that ultimately the government willingness, through the central bank, to always provide necessary loans of reserves, is what underpins the viability of the financial system.

While the banks can loan me the funds to pay my taxes, they can never generate reserves to clear the transactions if there is a shortfall. That is the unique capacity of the government via its central bank.

The complexity of the system is also reflected in the various voluntary institutional and accounting practices that the government might introduce as part of its spending and borrowing operations.

I discussed these issues in this blog post – On voluntary constraints that undermine public purpose (December 25, 2009).

So governments create accounts with the central bank and channel tax receipts and borrowings into these accounts and have regulations or rules that require certain balances to exist in these accounts from which government spending is then accounted for.

The illusion is that these accounting arrangements are intrinsic constraints.

While they cannot be an intrinsic financial constraint on government, they clearly serve as inertial forces on government spending because they become political tools.

People react negatively when an opposition politician starts accusing the government of rising debt levels, etc.

So for Japan, there are institutional and accounting conventions that would lead to the interpretation that motivates this question.

For example, this Bank of Japan document – Chapter IX Treasury Funds and Japanese Government Securities Services – provides a detailed account of the operational arrangements relevant to Japanese government spending and bond-issuance and the role of the Bank of Japan in facilitating the same.

The BoJ provides “various treasury funds services under acts and ordi- nances such as the Bank of Japan Act (Article 35) and the Public Account- ing Act (Article 34).”

The BoJ says that “these services consist of”:

(1) the receipt of revenues and payment of expenditures; (2) accounting for increases and decreases in government deposits as receipt and payment of treasury funds are carried out; and (3) the sorting of receipts and payment of treasury funds for government agencies and specific government accounts, calculating their respective total amounts, and checking them against those calculated by the government agencies themselves …

In this context, the BoJ interaction with the rest of the Japanese government is more broad than that of the US Federal Reserve and most other central banks.

The BoJ says that concentrating “all the services related to Japanese government’s deposits … enables the Bank, from a unified standpoint, to obtain information on the government’s funds management accurately and swiftly; therefore, the Bank can conduct appropriate open market operations based on the supply and demand conditions in government funds”.

That is a very significant statement.

Notice the reference to “a unified standpoint” – which reflects the Bank’s awareness that the Ministry of Finance functions in the Japanese government are intrinsically related to its own operations.

I discuss the concept of consolidation in thes blog posts (among others):

1. The consolidated government – treasury and central bank (August 20, 2010).

2. The sham of central bank independence (December 23, 2014).

This is one of the areas where several critics of MMT have focused, claiming that the MMT focus on consolidation is at odds with their perception of reality.

They claim that MMT presents a fictional account of the world that we live in and in that sense fails to advance our understanding of how the modern monetary system operates.

This fiction is centred on the way MMT ‘consolidates’ the central bank and treasury functions into the ‘government sector’ and juxtaposes this with the non-government sector.

I discussed that issue in this blog post (among others) – Marxists getting all tied up on MMT (May 1, 2019).

But what the critics miss, is that despite the appearance that central banks have become independent of the political process, an appearance that is reinforced by false statements from my profession, the fact is that at the level of substance, the central bank and the treasury departments work closely together on a daily basis.

The BoJ’s statement above reflects that substance.

They realise that if they provide comprehensive services to the Ministry of Finance (in terms of the operations and impacts of fiscal policy on liquidity) that they can manage the state of liquidity in the monetary system, which, in turn, means they can more effectively calibrate their liquidity management interventions (open market operations or bond sales to drain excess reserves) in the face of what they acknowledge are “wide … fluctuations in the government deposits”.

The Bank of Japan also notes that its operations are legitimised under law by “approval of the government – specifically, the Finance Minister”, and these approvals extent to who the BoJ can contract with in the non-government sector to act as “agents” to “receive and pay treasury funds”.

The BoJ provide this diagram to describe the way government transactions are facilitated in Japan.

The record keeping of a tax payment, for example, follows this sequence:

1. Notification of tax liability from government to individual.

2. Taxpayer pays cash to BoJ or agent or their bank account is debited.

3. Tax payment received and is reported.

4. “Funds received by agents of the Bank are then settled by debiting the BOJ account of each agent and crediting government deposits at the Bank.”

5. BoJ processes information.

6. BoJ checks information against change in government deposits.

7. BoJ transmits information to tax authorities.

8. BoJ checks transactions.

The record keeping of a government expenditure (for example, for a public works payment):

1. Government notifies transfer of funds to contractors.

2. Information sent to “Accounting Center of the Ministry of Finance”.

3. “Accounting Center organizes the payment data from the relevant ministries” sends them to BoJ and instructs BoJ to credit “designated deposit accounts”.

4. BoJ sends notice of payment to “designated financial institutions” and relevant credits. BoJ also “debits the total amount of public works expenditures from the government deposits and credits the BOJ accounts of the designated financial institutions.”

5. Financial institutions (banks, etc) credit the accounts of relevant contractors following the BoJ instruction.

6. BoJ checks all transactions on a monthly basis.

The Government deposit account at the BoJ is a central vehicle for recording the “Treasury funds” that “are received and paid to the private sector” in Japan.

There are a “large number of transactions of treasury funds of enormous value” recorded through the deposit account every day. The timing of these flows varies across months according to the policy structure in place.

So shortfalls and surpluses in the deposit account regularly appear across time and seasons.

The BoJ observes that the “flow of treasury funds between the government and the private sector (fiscal balance) affects the balance of financial institutions’ BOJ accounts” on a daily basis, increasing them when a government payment is made and vice versa.

The BoJ and the ministries work closely together so the BoJ can manage the liquidity in the system on a daily basis.

Bank of Japan and MoF bond-issuance

If the Government deposit account “is in need of extra funds in the short term, it raises such funds by” issuing, what are now referred to as – Treasury Discount Bills (T-Bills).

While the government issues these Bills via public auction, the BoJ can underwrite the Bills when the “government is in unexpected need of funds, or when the bids from financial institutions fall short of the amount offered”.

In general, the BoJ can always underwrite the issuance of T-Bills or Japanese government bonds (JGBs) if there is a perceived need.

Further, the – Bank of Japan Act 1942 (Amended 2007) – makes it clear that the “Prime Minister and the Minister of Finance” can “request the Bank of Japan to conduct the business necessary to maintain stability of the financial system, including the provision of loans” (Article 38).

Article 4 of that Act also requires the BoJ to “maintain close contact with the government” to ensure:

… its currency and monetary control and the basic stance of the government’s economic policy shall be mutually compatible.

Again, reinforcing the MMT view that consolidation does not result in loss of insight.

Article 5 of the – Public Finance Act 1947 – is also often cited as probiting the BoJ from underwriting JGBs or T-Bills or making loans to the Government.

The Article does say, however, that the provisions do not apply if the Diet specifies special reasons.

Article 32 of the Bank of Japan Act refers to Article 5.

We learn that the BoJ in the course of its normal business with the national government can:

1. Make “uncollateralized loans within the limit decided by the Diet as prescribed in the proviso of Article 5 of the Fiscal Act (Act No. 34 of 1947)”.

2. Make “uncollateralized loans for the national government’s temporary borrowing permitted under the Fiscal Act or other acts concerning the national government’s accounting”.

3. “Subscribing or underwriting national government securities within the limit decided by the Diet as prescribed in the proviso of Article 5 of the Fiscal Act”.

4. “Subscribing or underwriting financing bills and other financing securities”.

Which should leave one in no doubt that if the national government determines, the BoJ will fund its deficits.

The recent QQE programs that the BoJ has been running just accomplishes that task indirectly by secondary bond rather than primary bond markets.

But like most ‘legal restrictions’ there are ways around and the law can be changed by the government when it desires (mostly).

In relation to the issuance of JGBs, the BoJ provides extensive financial and accounting services.

Here we learn a bit about how ideology enters the construction of the legal and accounting practices.

The BoJ document cited above states that these prohibitions (in the relevant Acts) are driven by the:

… lessons learned through the histories of major countries, including Japan. These lessons tell us that if a central bank were to provide credit to the government by, for example, underwriting JGBs and TBs, the government might lose its ability to maintain fiscal discipline (the self-discipline to balance revenues and expenditures). In such a case, there would be no brake to stop the government from making the central bank increase the amount of central bank money, which would induce spiraling inflation. This would end up in a loss of confidence, both domestically and internationally, in the country’s currency and its economic policy.

Which is a somewhat farcical statement given the modern history of Japan that is summarised by these facts:

1. Japan has run continuous deficits since 1992, sometimes reaching over 10 per cent of GDP.

2. Japanese government debt to GDP has risen to around 240 per cent.

3. The Bank of Japan total assets have risen to (November 19, 2019) 575,670,234,193 thousand yen, of which 484,844,756,867 thousand yen are held as Japanese government bonds.

On January 10, 2009, total assets were 116,551,962,006 thousand yen, of which 63,525,289,021 thousand yen were held as Japanese government bonds.

4. The Bank of Japan now holds around 43 per cent of all government bonds up from about 8 per cent just before the crisis.

5. Inflation is low verging on negative.

6. Long-term bond yields are negative.

7. Interest rates are low to negative.

8. The long-term inflation expectations by firms are flat and very low.

The BoJ JGS services for the government are comprehensive.

In the case of public auctions of JGBs (JGS), the – JGB Book-Entry System – provides the accounting and procedural framework whereby successful bidders receive notification and payments are made.

The transactions are all conducted within the “Bank of Japan Financial Network System — BOJ-NET Funds Transfer System (FTS) and the BOJ-NET JGB Services”.

The various categories of participants that can purchase JGBs have financial accounts either directly with the BoJ or linked to accounts at the BoJ.

The clearing system for payments for JGBs is fairly complicated given the diversity of participants, but, in essence, can be distilled to some simple accounting.

1. Customers who wish to buy JGBs request a purchase from a so-called direct participants directly or via other intermediaries (indirect participants, Foreign Indirect Participants (FIPs), who then communicate the requests to the Bank of Japan.

2. Ultimately what happens is that the bank account of the customer are debited and then through a sequence of debits and credits through the intermediaries, a credit is made at the Bank of Japan to the relevant account.

3. So we understand that a bond purchaser has funds in an account somewhere, which comprise a component of their current wealth portfolio, and are not destined for consumption or productive investment spending. The customer chooses to alter their wealth portfolio in order to purchase some JGBs.

In terms of accounting for bond-issuance, the BoJ also facilitates payments of principle and interest on outstanding JGBs via the Government deposit account.

It debits the Government account to “make payments for the principle and interest” to the relevant beneficiaries.

The BoJ “receives principal and interest on behalf of all the JGS holders from the government (MOF) and credits the funds directly to partici- pants’ BOJ accounts; and the participants then pay their customers.”


We are now in a position to answer the question.


One interpretation of MMT that is often heard in Japan is that the government first issues government bonds and then spends the proceeds. In this case, government bonds appear as assets in the balance sheets of the private banks who purchase the debt. The same amount appears as deposits (liabilities) in the banking system as the government spends an equivalent amount. This would suggest there is no increase in the monetary base. So a lot of debate in Japan claims that MMT denies the necessity of government expenditures being accompanied by an increase in the monetary base. Is this view a correct interpretation of MMT?

From the Background information provided above, we can conclude that:

First, the interpretation, which implies that government bond issuance is necessary to facilitate the government’s yen expenditure is incorrect.

Clearly, the accounting arrangements with the BoJ might lead one to think that the causality runs from bond sales -> credits of Government deposit account at BoJ -> debits of account and credits of private bank accounts (via the relevant Current Account Deposits at the BoJ) to account for the government spending.

But while that is a convention, the BoJ can fund the government directly (as per the special cases in the relevant Acts).

And the government can change the accounting arrangements anyway via legislative changes.

These ‘rules’ and ‘accounting’ conventions that governments erect are all political and ideological artifacts that keep most of us from seeing what the true arrangements and operations are.

Second, the conclusion that bond sales accompanied by government spending of an equivalent value (in currency terms) do not “increase the monetary base” is not necessarily correct and depends on some other factors, which I specify below.

According to the Bank of Japan’s – Explanation of “Monetary Base Statistics” – the monetary base is “Currency Supplied by the Bank of Japan and is defined as follows”:

Monetary base = Banknotes in Circulation + Coins in Circulation + Current Account Balances (Current Account Deposits in the Bank of Japan)

They note that:

1. “The ‘Banknotes in Circulation’ and ‘Coins in Circulation’ in the monetary base include cash (banknotes and coins) held by financial institutions, while “Currency in Circulation” in the Money Stock Statistics does not.” So, they exclude liquidity created by the the private banks from the definition.

2. In April 1981 they substituted the term “Current Account Balances” for the previously used term “Reserve Balances”.

The reason they gave is that “Current Account Balances … includes deposits by institutions not subject to the Reserve Requirement System”, whereas “Reserve Balances” apply to the financial institutions regulated for required reserve balances.

So the Bank of Japan “accepts deposits from financial institutions to their current accounts they hold at the Bank”.

We learn that (Source):

Financial institutions hold current accounts at the Bank. The Bank also provides current account services to governments, central banks, and international organizations. It does not accept deposits from individuals or firms. This is because the main objective of the Bank’s acceptance of deposits is to maintain smooth and stable functioning of payment and settlement systems in Japan, as part of its role as the nation’s central bank.

There are three functions played by these accounts:

(1) Payment instrument for transactions among financial institutions, the Bank, and the government;

(2) Cash reserves for financial institutions to pay individuals and firms; and

(3) Reserves of financial institutions subject to the reserve requirement system.

Impact on monetary base of bond-issuance

Say that the government sells bonds to the non-government sector worth 100 yen (could be trillions, billions, or whatever unit).

It doesn’t really alter the analysis if the commercial banks buy the bonds directly or facilitate purchases made by other non-government customers.

When the government issues bonds, it exchanges the bond asset for a payment of currency, which leads the BoJ to mark down the Current Account Balances of the relevant purchasing bank or bank of the purchaser.

So, at that point, the monetary base declines by 100 yen.

While the monetary base declines, the net wealth of the non-government sector is unchanged in levels but altered in composition – increase in JGB holdings, decrease in deposits held in banks (in the first instance).

The national Government deposit account at the BoJ rises by 100 yen as a result of the sale of the bonds to the non-government sector.

Impact on monetary base of government spending

When the government net spends, there is an overall increase in non-government sector bank deposits of 100 yen (in this instance), representing payments for goods and services sold to the government.

At the same time the reserves held by the private banks at the BoJ increase by 100 yen, which represents an additional asset for the private banks and a liability for the central bank.

The rise in the liabilities of the private banks, via the rise in deposits of the non-government, is matched by their increased holdings of reserves at the central bank.

Thus, the net positions of the central bank and the banks are unchanged.

And, the balance in the national Government deposit account at the BoJ falls back to its initial level.

Importantly, the monetary base rises by 100 yen as a result of the government spending adding to the reserves in the non-government banking system.

Further, while the bond sale did not change the net financial position of the non-government sector, a basic insight drawn from Modern Monetary Theory (MMT) is that government spending increases net financial assets in the non-government sector – yen-for-yen (in this case).

At this stage, the monetary base has returned to its previous level as the reserve balances fall and then rise again.


Think about the initial bond sale and swap of reserves. Where did the banks get the reserves from to accomplish this transaction if at that point there were no excess reserves in the system?

Typically, the central bank will offer so-called repurchase agreements where the central bank buys bonds from the banks who promise to buy them back at some specified date.

This provides sufficient reserves to allow for a settlement to go forward on the bond auction. So the monetary base increases before the bond auction to facilitate it and then shrinks when the bonds are purchased at the completion of the auction.

How the repurchase reversal plays out is not important for this story.

Further, consider the situation for the central bank which may desire to maintain a positive target, short-term interest rate.

The reserves held by the private banks at the central bank, which enable the operation of the payments system, have risen by 100 yen, and, while economic activity has increased, the private banks may be reluctant to hold an additional 100 yen in reserves.

Assume the banks only desire to hold 10 yen of these extra reserves to meet the expectations of increased payments activity that will probably accompany the increased economic growth following the government spending injection.

So overall, there are 90 yen of excess reserves in the Current Account Balances at the BoJ.

Those private banks holding excess reserves will try to loan them to other banks in the Interbank market.

Given that there is a system-wide excess, that is, an overall excess supply of reserves, the Interbank rate would be driven down below the central bank’s target level by this lending activity in the absence of central bank action. In fact, it would be driven down to zero in the absence of any support measures (interest payments on excess reserves).

In this situation, the BoJ would normally offer and additional 90 yen worth of government debt to the private banks, which will attract an interest rate in excess of the interbank rate.

The banks will thus have an incentive to buy this treasury debt.

This action by the central bank will remove the downward pressure on the Interbank rate and thus protect the integrity of monetary policy, which is identified with setting of a target interbank rate.

Thus the coordination of central bank and treasury operations is required to implement this program of government deficit spending.

The point of our example is that:

1. Where the monetary base is defined as the total bank reserves, held at the central bank plus currency held by the non-government sector, a bond sale reduces the monetary base because reserves are exchanged for the bond assets. But if there are repurchase agreements in place to facilitate the auction settlement then the impact on the monetary base could be different.

2. The increase in government spending creates an increase in bank reserves and the monetary base.

3. If the central bank is targetting a positive interest rate, then it has to drain the excess reserves created by the increased government spending by swapping government bonds (or other interest-bearing assets) for the bank reserves. In that case the monetary base shrinks by the amount of the draining operation – in this case 90 yen.

4. The net financial assets held by the non-government sector are defined as their holdings of net financial assets plus the monetary base. They have increased.

For basic Modern Monetary Theory (MMT) concepts, please read the following introductory suite of blog posts:

1. Deficit spending 101 – Part 1 (February 21, 2009).

2. Deficit spending 101 – Part 2 (February 23, 2009).

3. Deficit spending 101 – Part 3 (March 2, 2009).


There were other questions and I will get to them at another time.

That is enough for today!

(c) Copyright 2019 William Mitchell. All Rights Reserved.

Some reflections on my time in Japan while I am too busy to write

Published by Anonymous (not verified) on Thu, 07/11/2019 - 9:42am in



Today, I have several commitments in Tokyo and then a long flight so I decided not to try to finish Part 4 of my Q&A – Japan style series and will post the final part on Monday. For today, you will have to be content with some photos from the current trip to Japan and some comments. But who are those business-suited people in Tokyo wandering around in the mornings picking up garbage (see below)? Normal transmission resumes on Monday.

Tokyo lecture, November 5, 2019

It is clear that MMT is a talking point in Japan and there are many different interests who are pushing it into the political and economic debate. On Tuesday, I gave a presentation at the Japanese Diet and attended a reception afterwards with various government members.

Here is a photo of the audience in Tokyo at the Diet (Parliament) where I presented a symposium on Tuesday, November 5, 2019. The event was a ‘sell out’ (well over 300 attended) and the audience included Members of the Japanese Parliament, Cabinet ministers, advisors, bureaucrats and the general public.

A full video of the presentation will be available soon and I will post a link.

A 1 hour press conference followed with all the major agencies involved.

Reuters Japan wrote about it in this report (November 5, 2019) – 消費増税、3度目の誤り=MMT理論のミッチェル教授が都内で講演 – which roughly translates to “Consumption tax hike – the third error according to Professor Mitchell at an MMT Lecture in Tokyo”.

The article did not report very faithfully what I actually said but did get the following points right:

1. Government fiscal policy is not financially constrained for a currency-issuing government.

2. Raising the consumption tax rate in Japan will have a negative impact on the economy, similar to previous tax increases.

3. Professor Mitchell described MMT as “a lens-like framework for understanding macroeconomics …”

4. If a country issues its own currency and is not at full employment, there are no (financial) restrictions on fiscal spending. He explained that such fiscal spending is possible until there is a tight supply and demand situation in the real economy and price pressure enter the picture.

5. Professor Mitchell stressed that current mainstream economics cannot explain the current state of developed economies such as Japan.

6. He criticised the Green New Deal terminology and suggested what was really at stake was a government funded framework to ensure that the pain of adjustment was shared across all sectors and communities. If there is a Just Transition framework as the focus then the climate issues, which depend on human agency, will be addressed.

Here is another picture from the Diet Room as my host Professor Fujii was doing the introductions.

I want to thanks Professor Satoshi Fujii who organised the events (and logistics) and his graduate student team who helped make the event, the press conferences, photo sessions and reception dinner work smoothly.

Special thanks to Numajiri for escorting me around Tokyo.

Special thanks to Eric (Nyun) for his tireless work promoting MMT in Japan and Chie for all her help.

Kyoto, November 4, 2019

I attended a lovely lunch with the – Rose Mark Group – in Kyoto on Monday which was followed by a workshop on MMT. Many of the questions that I have been answering in my blogs this week came out of this interaction.

They are a leading progressive anti-austerity movement in Japan.

I will post the video link when it is ready for release.

The room was at capacity and the interaction was productive.

Here is a photo we took together before the workshop.

The next photo was the product of a bit of humour at the workshop.

The projector for the workshop needed to be raised and one of the organisers was carrying around Randy Wray’s book on MMT and decided it was a perfect wedge. I told the audience that I was going to tell tales (-: So Randy! Guess what, there has been a productive use found for your book!

But with all those inserted coloured tags, you can also see devotion to study!

The next photo was at the vegetarian lunch before the event. There is a strong Buddhist tradition in this area of Kyoto and the traditional vegetarian food is excellent and provided to be consistent with my own dietary preference, for which I was very grateful.

I was asked to make a 3 minute introduction and I stressed the importance of building global MMT-anti-austerity networks. I hope that the Rose Mark group reach out to the MMT groups in other countries (GIMMS, Spain, Italy, France, Germany, Finland, Australia, New Zealand, the Netherlands, etc).

And I hope those groups reach out to Rose Mark and start building the global anti-austerity, pro MMT coalition. Strength in numbers.

I want to thank the Rose Mark team – Professor Matsuo Tadasu, Professor Park Seung-Joon, Akiko Oisi, Minako Saigo, Noriko Kawai and all the rest of the Ritsumeikan University and Rose Mark team for their help and hospitality.

Kyoto, Saturday, November 2, 2019

I presented an MMT workshop at Kyoto University to a good group of academics and post graduate students.

Here is a photo of the room about 30 minutes before the session began.

There will be a video of this session as well.

As in the other Kyoto event, the presentation was consecutively interpreted which is a pretty tough gig. You continually lose the flow of the narrative and keep wondering where to stop so the interpreter can do their part.

The presentation at the Diet in Tokyo was simultaneously interpreted which is a lot easier. One just has to speak more slowly than usual and make technical terms very clear.

Thanks to Kyoto University (and Professor Fujii) for hosting this event and the hospitality they extended to me.

Other activities

Yesterday, I did a range of media interviews including a long session with a TV documentary series – The Capitalism of Greed – that is produced by NHK (the national broadcaster in Japan).

That program will air in early January with Japanese sub-titles I believe.

It was great interview because it went broadly into the history of economic thought and right through to the development of MMT and then onto specific policy issues relating to Japan and how I constructed them from an MMT perspective.

The other 7 odd interviews were pretty standard – rehearsing the fears that MMT was an out-of-space plot to destroy the world. But we got through them just fine and I will be interested to see how the mainstream press renders the answers.

At the reception last night at the Diet, I met a number of senior government members of the Diet including some Ministers and we were able to have a frank discussion. There is clearly a rift in the ruling coalition and one Member indicated that the MMT group within the government was growing in size.

There is a lot of energy around pushing the agenda and I was happy to play a small part in it.

The range of people I met was diverse in political terms and while some progressives might think it wrong to discuss MMT and policies with more conservative interests, my view is that education is a powerful tool and if the progressive side wants to expand in size then it has to by definition recruit dissidents from the other side of the fence.

I was doing by hardest as an MMT recruitment officer.

The other point I would make is that the more conservative interests helped book the Diet facilities for two days to allow the presentations and press work, including the TV recording and was able to get me into the top levels of the Japanese government to talk about MMT in a casual and effective environment.

Anyway, there are now plans afoot for another speaking tour over a longer period in the new year. I will make those plans public when they are consolidated.

And outside of work

I saw some ancient places and drank fine green tea in beautiful tea houses like this one at Arashiyama, which is a short train trip from Kyoto. We made it a longer train trip because we boarded the express train instead of the local train at Nijo and it didn’t stop at Saga-Arashiyama as we planned. So we saw a bit more of the countryside than originally intended but that included some beautiful gorges in the mountains near there.

Anyway, this was nice time.

And, while I was out running in Tokyo yesterday, up around the Yotsuya station and Sotobori Park, I came across a large group of men and women (mostly men) dressed to the ‘pins’ in business suits (men with ties etc), wearing white gloves and green vests (with a cement company sign on the back).

They were carrying huge plastic garbage bags in one hand and a extension hand for picking up things in the other and they were wandering around picking up every bit of paper and other rubbish they could see. They were in parks, around the local station, and in the streets.

I decided not to take a too-closer up photo of the group (didn’t want to be rude) but snuck a rear shot of one of the stragglers and here it is (from afar).

I have sought information on who these people are and am awaiting a response.

But the cities are spotless compared to Australian cities and this is one reason. But who are these characters?

By the way, both in Kyoto – along the Kamo river; and in Tokyo – around the Akasaka Imperial Property (outer boundary) and the Imperial Palace circuits – are brilliant places to train.

Normal transmission returns on Monday but in-between will be the hardest quiz I can think of.

That is enough for today!

(c) Copyright 2019 William Mitchell. All Rights Reserved.

Q&A Japan style – Part 3

Published by Anonymous (not verified) on Wed, 06/11/2019 - 9:50am in

This is the third part of a four-part series this week, where I provide some guidance on some key questions about Modern Monetary Theory (MMT) that various parties in Japan have raised with me. Today I am in Tokyo and doing a day of press interviews and some TV filming to promote MMT within the Japanese media. I had been very clear in press interviews already (yesterday) that I hope they they represent our ideas correctly to the people of Japan. For example, at yesterday’s press conference, after my lecture in the Japanese Diet (Parliament), I said that I didn’t want any of the many journalists present to leave the room and write that ‘MMT thinks that deficits do not matter’ or that ‘MMT was about governments printing money and spending it’. I hope the message gets through. As I noted in Parts 1 and 2, many people have asked me to provide answers to a series of questions about MMT, and, rather than address each person individually (given significant overlap) I think that answering them in some depth is the more efficient way to help them to better learn and understand the essentials of MMT and real world nuances that complicate those simple principles. These responses should not be considered definitive and more detail is available via the referenced blog posts that I provide links to. Today, the question is another one about the Green New Deal and the Job Guarantee with a diversion into basic income.

Job Guarantee and Green New Deal (continued)


On January 19, 2019, there was a joint-statement published by the Wall Street Journal – Economist’ Statement on Carbon Dividends – which was signed by more than 3500 US economists including 4 former FRB chairmen and 27 Nobel Prize laureates. It recommended that carbon tax be implemented “to reduce carbon emissions at the scale and speed that is necessary” and to “maximize the fairness and political viability of a rising carbon tax, all the revenue should be returned directly to U.S. citizens through equal lump-sum rebates.” In other words, they recommended a modest basic income guarantee be provided from the revenue raised by the carbon tax. Japan emits around 11 billion ton of CO2 and a carbon tax of $US100 per ton of emitted CO2 would generate 1,100 billion dollars in revenue, which equates to a monthly dividend per person of slightly less than $US100. Are the MMT economists in favour of this proposal?

There are several considerations to this question.

First, MMT economists, in general, do not consider that essential equity measures that a government might desire to set in place are contingent or dependent on the government first raising revenue from other sources.

If it was desirable to provide a basic income guarantee of $US100 per person in Japan, then the Japanese government has the currency-issuing capacity to make that possible.

The consideration then, which is to really reverse the logic of the question, is that if that desirable intervention strained the relationship between nominal spending growth and the real productive capacity of the economy then to avoid inflationary pressures from demand-pull forces developing the government may have to consider changing the tax structure and implementing new or higher taxes (among other anti-inflationary measures).

But this in no way implies the ‘taxes’ would be ‘funding’ the desired social measures.

Which raises a more general point that is often being debated in social media.

There appears to be a defensiveness among some activist proponents of MMT about the likelihood of governments having to raise taxes as one weapon to curtail a demand-pull inflationary episode.

The core MMT economists have always been clear on this.

At times, governments have to take difficult (and possibly unpopular) decisions to maintain price stability. One powerful policy tool they have at their disposal is the tax system.

MMT economists talk about the rise in the buffer stock of jobs under a Job Guarantee as being an integral component of the proposed price stability framework but what must be understood is that the increase is to be engineered by shifts in government policy – in this case, a contraction in the net spending position of government.

That contraction would in all likelihood involve some tax hikes.

I sense that the need among some activists to address specific political issues within a specific political context (say, the current US Presidential race) leads them to adopt these defensive positions (that tax increase offsets would not be preferred or required) and then attribute that view as being representative of the core MMT view.

It is not the core MMT view.

Second, MMT economists, in general, do not support the introduction of basic income guarantees. Instead, the solution to joblessness and the income insecurity that accompanies that status, is best dealt with by the introduction of a Job Guarantee.

As I have explained many times, a basic income guarantee surrenders to the neoliberal myth that government can do nothing to create more employment.

It is an individualistic rather than collective approach to the problem of poverty and inequality.

It thus constructs the problem of unemployment as an individual issue (‘blames the victim’) and proposes an individual solution – in this case, to create a number of passive consuming agents – whose only need that is recognised is that of a minimal stipend to avoid starvation.

This is instead of recognising, as economists before the neoliberal era understood full well, that mass unemployment could only be understood in structural terms – a systemic failure to create enough jobs.

And, after the non-government sector has determined its spending and saving decisions, if total spending is short of what it has to be to ensure all productive resources are employed, then there is only one other sector that can make up that shortfall – the government sector.

So the existence of mass unemployment tells us at least one other thing – that the fiscal position of the government is too tight and the government needs to reduce its surplus or increase its deficit (depending on the starting point).

So blaming the victim for this systemic failure is core neoliberalism and all progressives should eschew that tendency.

It is also clear that the introduction of a basic income guarantee would not provide a nominal anchor against inflation and so the nation would still be functioning within an ‘unemployment buffer stock’ world, where the government would have to increase unemployment in times of inflationary pressures that were due to excessive nominal spending (relative to the productive capacity).

Finally, and I address this issue in detail in the blog posts cited below, there is more to work than income. We gain social identity and self-esteem from our work. We broaden our social networks and our children do not inherit the disadvantages of growing up in a jobless household.

Basic income advocates overlook those additional advantages of employment.

An additional reason for preferring employment guarantees over basic income guarantees, is that within the context of a societal preference for work and an antagonism towards a ‘handout’ culture, the Job Guarantee can serve as a framework for re-evaluating what we mean by productive work.

At present, we are dominated by the ‘gainful work’ concept which considers an activity to be productive if it contributes to private profit.

This bias means we dismiss a huge number of activities that add social value as being unproductive or ‘make work’ or any of the other negative terms that public sector job creation elicits from conservatives (and many misguided progressives).

The Job Guarantee would allow a host of activities to be included in the Job Guarantee that do not support capitalist profit seeking and would thus provide a framework for expanding the range of functions that we consider to be worthwhile and productive.

The examples I often give are musicians and surfers. These activities are not normally considered to be ‘productive’ in the same way as a steel worker or a teacher is considered to be productive.

But there is tremendous scope for using these workers to expand well-being (for example, surfers could be employed to surf (duh) and also conduct water safety lessons for school children to avoid the drowning deaths that plague Australian summers).

And, as time passed, society would begin to recalibrate its sense of worth and broaden its notion of productive work.

This sort of transition will be essential as we move forward to addressing the massive climate change issues confronting us.

So for these reasons and many others (see cited blog posts below), income guarantees are inferior solutions to mass unemployment.

Further reading:

1. Basic income guarantee progressives cosy up with the worst CEOs in the world (April 4, 2018).

2. A Basic Income Guarantee does not reduce poverty (May 31, 2017).

3. A basic income guarantee is a neo-liberal strategy for serfdom without the work (April 5, 2017).

4. Why are CEOs now supporting basic income guarantees? (March 28, 2017).

5. Is there a case for a basic income guarantee – Part 1 (September 19, 2016).

6. Is there a case for a basic income guarantee – Part 2 (September 21, 2016).

7. Is there a case for a basic income guarantee – Part 3 (September 22, 2016).

8. Is there a case for a basic income guarantee – Part 4 – robot edition (September 26, 2016).

9. Is there a case for a basic income guarantee – Part 5 (September 27, 2016).

10. Employment guarantees are better than income guarantees (January 5, 2011).

11. Mass unemployment – its all about demand (February 13, 2013).

12. The possibility of mass unemployment – Part 1 (December 14, 2012).

13. What causes mass unemployment? (January 11, 2010).


The final part in this four-part series will probably appear next Monday as tomorrow I have to travel a long way and have other commitments to attend to before I do that.

That is enough for today!

(c) Copyright 2019 William Mitchell. All Rights Reserved.

3D Imaging Technology Inspired by Star Wars’ Holochess

Published by Anonymous (not verified) on Wed, 06/11/2019 - 4:37am in

This is awesome. This video from What the Future on the CNET channel on YouTube discusses Voxon Photonics VXI device. As the video’s host, talking to the company’s CEO, Gavin Smith, explains, this is a that uses a volumetric display to create three dimensional images. However, the device isn’t holographic, like its fictional inspiration in Star Wars, nor does it use Virtual Reality. Smith explains that it uses a very rapidly moving screen on which the image is built up in layers like a 3D printer. The screen moves too rapidly for the eye to follow it, and so the layers all blur into one image. At the moment, the device has a transparent cover to stop people reaching into the image. However, this isn’t necessary and the screen isn’t moving fast enough to do any harm.

The device debuted at the Tokyo Fair in 2018, and has found a number of applications. It comes with various devices that can rotate or otherwise manipulate the image. It’s been used for gaming, medical imagining, education at universities and schools, cars and video conferencing. However, the machine currently retails at $9,800 so they recognise it’s not a consumer device just yet. However, it’s price compares with that of other technologies when they first appeared.

Although it hasn’t happened yet, Smith and his company would like it to feature in the context that inspired it. They’d like it to appear in the Millennium Falcon at Disneyworld as a working holochess table, and they’ve devised a version that would make it possible. This uses a helical spinning screen rather than the type of screen the device normally uses.

This is absolutely amazing. When I was growing up, the SF predicted that we’d have 3D TV, but this definitely hasn’t happened so far. But with this device, we could be well on the way. As Max Headroom said when he briefly reappeared to do the channel ident for Channel 4,, ‘The future is now!’

Q&A Japan style – Part 2

Published by Anonymous (not verified) on Tue, 05/11/2019 - 9:16am in

This is the second part of a four-part series this week, where I provide some guidance on some key questions about Modern Monetary Theory (MMT) that various parties in Japan have raised with me. I have so far given two presentations in Kyoto and today I am in Tokyo addressing an audience at the Japanese Diet (Parliament) and doing some interviews with the leading media organisations in Japan. Many people have asked me to provide answers to a series of questions about MMT, and, rather than address each person individually (given significant overlap) I think this is the more efficient way to help them to better learn and understand the essentials of MMT and real world nuances that complicate those simple principles. In my presentations I will be addressing these matters. But I thought it would be productive to provide some written analysis so that everyone can advance their MMT understanding. These responses should not be considered definitive and more detail is available via the referenced blog posts that I provide links to. Today, the questions are about the Green New Deal and the Job Guarantee.

Green New Deal and the Job Guarantee


What is the role of the Job Guarantee in a Green New Deal? How do they square with the fact that big infrastructure projects that might be associated with the GND are not suitable as automatic stabilisers, in the sense that they cannot be abandoned if there is accelerating inflation?

In their eagerness to tie the Green New Deal in with Modern Monetary Theory (MMT), I have read several articles that put the Job Guarantee at the centre of government interventions that will be required.

First, I do not really like the term Green New Deal, particularly in a global sense, given its US-centric antecedents. The Wikipedia page for the – Green New Deal – shows how US-centric the notion has become.

Further, while FDRs New Deal was largely a cyclical program designed to deal with a collapse in non-government spending, the Green New Deal is not about resolving a cyclical shortfall in aggregate spending.

The various components of the New Deal were designed to advance what were referred to as the 3 Rs:

Relief – Measures to help the millions who were unemployed and homeless

Recovery – Policies to rebuild the economy that had suffered due to the Depression

Reform – Legislation and laws to create a fairer society

The reform component was largely in relation to the financial sector, which had created the Depression as a result of its poor performance.

The relief and recovery elements were what macroeconomists refer to as ‘counter-cyclical’ fiscal programs – working to redress non-government spending shortages, which leads firms to lay-off workers.

But the Green New Deal, as conceived, will be a structural program designed to significantly change the patterns of industry output, employment and the consumption patterns of households and firms.

It will have to fundamentally alter the line between government and market responsibility for resource allocation.

And it will require a fundamental reconfiguration of the concept of government putting the government at the centre of the transformations required.

I think that is appropriate because it will bring the responsibility for essential and planned action and the currency-issuing capacity together.

I outline my detailed views of the Green New Deal and MMT in this video presentation from September 23, 2019.

Second, instead of using the term – ‘Green New Deal’ – I prefer to focus on the human agency aspects, given we are talking about the impacts of anthropomorphic behaviour on the natural environment.

In that context, I would rather characterise the necessary transformation as a – Just Transition for the Future (JTF) – because I think if we can bring about meaningful and equitable change in human behaviour, we will solve the climate problems and save the world, as a by product.

This sort of causality chain is what I have in mind:

In the video noted above, I go into some detail of what the components of a Just Transition would look like.

I have been a long standing advocate of the introduction of a ‘Just Transition’ framework to ensure society deals with structural change, especially policy-induced changes, in an effective and equitable manner. We wrote about these issues well before the GND surfaced in the literature.

In this Report – A Just Transition to a Renewable Energy Economy in the Hunter Region, Australia (published 2008) – we demonstrated the major benefits to the Hunter and nearby Wyong regions (in NSW, Australia) from shifting from coal-fired power to a renewable energy economy but emphasised the need for the development of a ‘Just Transition’ framework.

This Just Transition Matrix summarises what I see as the dimensions of such a framework. In the video cited above I go into chapter and verse of what each of the elements involves. See also the further reading blog posts below.

The point is that, in this context, the introduction of a national Job Guarantee, might in fact, be only a small part of a Just Transition framework to deal with climate change.

We have to understand that the Job Guarantee is not just a job creation program.

In MMT, the Job Guarantee provides macroeconomic stabilisation which is defined in terms of ‘loose’ full employment with price stability.

In normal times, it might not create or sustain many jobs at all.

And, importantly, it might not be part of a fiscal ‘stimulus’ program.

As Randy Wray and I wrote in a paper published in 2005 in the Journal of Economic Issues (Vol 39, No. 1, March) – In Defense of Employer of Last Resort: a response to Malcolm Sawyer:

The ELR approach is not equivalent to pump priming … with the ELR program in place, “loose full employment” is maintained no matter what the level of aggregate demand happens to be …

Importantly, one could envision a deflationary government policy (increased taxes and/or reduced overall spending) accompanying the introduction of ELR to reach and sustain full employment. We do not recommend such a policy (unless there were excessive overall demand), but it shows that Sawyer has mistakenly conflated ELR with Keynesian pump priming.

ELR and Job Guarantee were equivalent terms when we wrote that article. The MMT team now uses Job Guarantee, more or less exclusively.

And those that equate the inherent Just Transition framework with a Job Guarantee thus imply that the Job Guarantee would be central part of that stimulus program.

Which really abstracts from the fact that the Job Guarantee as a macroeconomic stabilisation framework.

In the context, the Job Guarantee will supplement the other policies to ensure there is a jobs safety net at the bottom of the labour market for the most disadvantaged workers.

The Just Transition framework will require governments create significant numbers of skilled and permanent jobs, which are not suited to a buffer stock status.

A Job Guarantee should rather be advocated for as a base case macroeconomic stabilisation framework rather than being tied up in the massive transition that will be required to meet the climate change challenge.

Even if there was no environmental imperative, we would enjoy dramatic gains by substituting an employment buffer stock approach to price stability for the current, very damaging unemployment buffer stock approach.

I would prefer the Job Guarantee to be seen as something desirable and quite separate to the complexity of a Green New Deal implementation.

We need to be careful not to conceive of the Job Guarantee as a panacea for all the labour problems that will arise as we make a Just Transition and we also do not want to try to make the Job Guarantee do ‘too much’, otherwise, we will be disappointed.

Further reading:

1. The Job Guarantee is more than a Green New Deal job creation policy (December 17, 2018).

2. The Green New Deal must wipe out precarious work and underemployment (August 8, 2019).

3. Modest (insipid) Green New Deal proposals miss the point – Part 1 (July 25, 2019).

4. Modest (insipid) Green New Deal proposals miss the point – Part 2 (July 25, 2019).


The Green New Deal by Ocasio-Cortez, UK Labour or Varoufakis etc. is receiving attention in USA or Europe. What is the theoretical and personal relation between MMTers and proponents of GND?

I cannot comment on the “personal relationships” between the people or groups mentioned.

But, in general, I do not consider the concept of Green New Deal is viable unless there is a simulataneous acceptance that Modern Monetary Theory (MMT) provides a coherent response to the question “How will we pay for it?”, which is at the heart of resistance to the proposals.

The ‘How to pay for’ narratives always serve to derail a coherent discussions about the scope and magnitude of the transformation that will be necessary.

An MMT understanding allows us to dismiss the financial aspects of any likely transformation, and, instead focus on the real resource implications, which is core to MMT analysis.

In this respect, the Green New Deal will involve a massive transformation in real resource usage and, will in my view, require resolution to the most fundamental question of the organisation and ownership of the mode of production.

That is, it is unlikely that the transformation can be successfully completed within a capitalist system given the scope of the government intervention that will be required.

The elements of a Just Transformation framework will challenge the very basis of capitalist organisation that has morphed into a dominance of finance capital over industrial capital.

These elements will include:

  • Social and economic equity.
  • Well-paying and secure jobs for everyone who wants to work.
  • First-class education and training, health and aged care.
  • Government take back control of natural monopolies, strategic public assets etc.
  • Community resilience and well-being for all regions.
  • Stable and ethical financial system.
  • 1st-class public infrastructure – transport, communications, utilities, etc
  • Sustainable energy security.
  • Meaningful and sustainable climate action.

So widespread nationalisation of what were once public utilities, elimination of most speculative financial activity, revamped education and training systems focused on societal well-being rather than feeding private profit, elimination of the precariat labour, elimination of speculative behaviour in energy production and the big carbon producers, and more.

MMT economists may differ about the specifics of these elements – in terms of importance and design features – but are at one with the view that the discussions should never be about the financial capacity of government to pursue and implement them.

We are united in eschewing the involvement of the financial markets in ‘funding’ the transformation, which many Green New Deal advocates think is an essential step towards viability.

Some of the groups mentioned in the Question fall into this trap, which is based on an erroneous understanding of the capacities of the currency-issuing government.


The merit of the Job Guarantee Program (JGP) is that the number of workers and hence the amount of fiscal expenditure under this program reduces automatically with economic expansion. But what kind of public works can be easily retracted without creating continuity problems? Is it possible to regulate the economic fluctuations automatically with a Job Guarantee?

In this 2008 Report – Creating effective local labour markets: a new framework for regional employment policy – we set out to provide a comprehensive and practical framework for motivating discussions about implementing the Job Guarantee.

It is clearly set out within the institutional structure of Australian government but the principles we established generalise.

This CofFEE Policy Report develops a new framework for the design of regional employment policy. It emphasises increased public sector infrastructure spending, the implementation of a National Skills Development framework and the introduction of a national Job Guarantee.

Our proposed new integrated policy framework will provide more effective ways to assist disadvantaged individuals into employment and advance sustainable solutions to persistent unemployment across regional Australia.

As one aspect of that framework, we proposed a – Job Guarantee – whereby the government operates a buffer stock of jobs to absorb workers who are unable to find employment elsewhere – whether that be in the private sector or the regular public sector.

The pool expands (declines) when private sector activity declines (expands).

The JG fulfills this absorption function to minimise the costs associated with the flux of the economy.

So the government continuously absorbs into employment, workers displaced from the private sector.

The “buffer stock” employees would be paid the minimum wage, which defines a wage floor for the economy. Government employment and spending automatically increases (decreases) as jobs are lost (gained) in the private sector.

It is clear that this overall aim has implications over the economic cycle and the cyclical nature of Job Guarantee jobs presents an operational design challenge for the administration of such a scheme and the design of the Job Guarantee jobs.

Job Guarantee jobs would have to be productive yet amenable to being created and destroyed in line with the movements of the private economic cycle.

To avoid disturbing private sector wage structure and to ensure the JG is consistent with stable inflation, the JG wage rate is best set at the minimum wage level.

The JG wage may be set higher to facilitate an industry policy function.

The minimum wage should not be determined by the capacity to pay of the private sector. It should be an expression of the aspiration of the society of the lowest acceptable standard of living.

Any private operators who cannot “afford” to pay the minimum should exit the economy.

The question though is questioning how a ‘buffer stock’ can operate effectively and be driven by the private economic cycle, yet still be logistically possible to organise into effective work effort.

While challenging this is not an impossible requirement for public policy to meet. The private sector does not have a monopoly on being able to mobilise a diverse range of resources and successfully complete thousands of tasks within a tight and complex schedule.

Note also that the private sector scheduling is in some sense much less flexible because it cannot afford to “inventory” workers who are (temporarily) unneeded.

Job Guarantee can employ workers even before precise tasks are assigned, helping to smooth transitions.

The cyclical nature of the jobs suggests that in designing the appropriate Job Guarantee jobs the buffer stock should be split into two components:

  • A core component that represents the ‘average’ buffer stock over the typical business cycle given government policy settings, trend private spending growth, and a mismatch of labor force characteristics and employer preference.
  • A transitory component that fluctuates around the core as private demand ebbs and flows.

The economic cycle fluctuations of employment are not nearly as large as people would like to believe. We have estimated that the total fluctuation between peak and trough in the Job Guarantee pool would perhaps be in the range of 25 per cent of the pool.

So there will be a fairly steady core of workers always in the pool. Nothing like from zero in a boom to millions in a recession.

Modelling can provide a guide to the ‘steady-state’ jobs that would be initially offered under the Job Guarantee scheme.

Administrators would then prioritise work allocations from a broad array of community enhancing activities. In this way, it is unlikely that any important function or service would be terminated abruptly, due to a lack of buffer stock workers, when the private demand for labour rises.

Thus, the design and nature of Job Guarantee jobs would reflect the underlying notion of a buffer stock.

This stock would, in turn, have a ‘steady-state’ or core component determined by government macroeconomic policy settings, and a transitory component determined by the vagaries of private spending.

In the short-term, the buffer stock would fluctuate with private sector activity and workers would move between the two sectors as demand changes.

Longer-term changes in the size of the average buffer stock would reflect discrete changes in government policy.

It is in this context that we argued for the existence of a stable core, which might change slowly and predictably as government policy settings change, and which would allow Job Guarantee administrators to more easily allocate workers to jobs.

Many of these core jobs would be more or less permanent. More ephemeral Job Guarantee activities could then be designed to ‘switch on’ when private demand declined below trend.

These activities would not be used to deliver outputs that might be required on an ongoing basis, but would still advance community welfare.

For example, Job Guarantee jobs in a particular region might be used to provide regular shopping or gardening services for the frail aged, to support the desire of many older persons to remain in their own homes.

It would not be sensible to make the provision of these services transitory or variable, and they would thus be provided from the core buffer.

Clearly, these services could be reassigned to become ‘mainline public sector’ work if a political shift in thinking occurred.

The structure of these jobs and the remuneration paid would however not be altered as a consequence of this political shift. Other ‘off-the-shelf’ projects would be undertaken or completed only when the Job Guarantee pool expanded sufficiently.

In the 2008 Research Report I cited at the outset of this answer, I noted that we sought to develop an inventory of jobs that satisfy several principles (see below).

These jobs would be accessible to the lowest skilled workers, generate benefits by way of meeting unmet demand for community development, personal care and/or environmental care services and more.

We sought detailed information from local governments on the type of jobs they could supervise that satisfied these criteria, including supervision and capital equipment costs and other relevant factors.

The local governments surveys revealed a myriad of community- and environmentally-based projects that could be completed if federal funds were forthcoming.

The JG workers would contribute in many socially useful activities including urban renewal projects and other environmental and construction schemes (reforestation, sand dune stabilisation, river valley erosion control, and the like), personal assistance to pensioners, and other community schemes.

For example, creative artists could contribute to public education as peripatetic performers.

The buffer stock of labour would however be a fluctuating work force (as private sector activity ebbed and flowed).

The design of the jobs and functions would have to reflect this.

Projects or functions requiring critical mass might face difficulties as the private sector expanded, and it would not be sensible to use only JG employees in functions considered essential.

Thus in the creation of JG employment, it can be expected that the stock of standard public sector jobs, which is identified with conventional Keynesian fiscal policy, would expand, reflecting the political decision that these were essential activities.

The exercise we carried to build an inventory of suitable jobs – both core and transitory – was specific to Australia – our institutional structures, cultures and specific community and environmental care needs.

The methodology, however, can be easily implemented elsewhere to create culturally- and institutionally specific job inventories to guide the introduction of the JG in any nation.

Further Reading:

1. When is a job guarantee a Job Guarantee? (April 17, 2009).


To be continued in Part 3.

That is enough for today!

(c) Copyright 2019 William Mitchell. All Rights Reserved.

Q&A Japan style – Part 1

Published by Anonymous (not verified) on Mon, 04/11/2019 - 9:50am in


Japan, Q&A

This is the first part of a four-part series this week, where I provide some guidance on some key questions about Modern Monetary Theory (MMT) that various parties in Japan have raised with me. The public discussion about MMT in Japan is relatively advanced (compared to elsewhere). Questions are asked about it and answered in the Japanese Diet (Parliament) and senior economics officials in the central bank and government make comments about it. And political activists across the political spectrum are discussing and promoting MMT as a major way of expressing their opposition to fiscal austerity in Japan. The basics of MMT are now as well understood in Japan as anywhere and so the debate has moved onto more detailed queries, particularly with regard to policy applications. So as part of my current visit to Japan, I was asked to provide some guidance on a range of issues. In my presentations I will be addressing these matters. But I thought it would be productive to provide some written analysis so that everyone can advance their MMT understanding. These responses should not be considered definitive and more detail is available via the referenced blog posts that I provide links to.

Monetary policy versus Fiscal policy


Do MMT economists suggest the central bank policy interest rate should be fixed at zero because: (a) investment expenditure is relatively insensitive to interest rate changes; (b) a highly variable interest rate, even it can influence investment, will spread a sense of uncertainty within the private sector?

Mainstream economists believe that the central bank can maximise real economic growth by achieving price stability. Consistent with this view is the belief that when the central bank target interest rate is below the ‘neutral rate of interest’, inflation will break out (eventually) and vice versa.

So the neutral rate is sometimes called the equilibrium interest rate. It has a direct analogue in the labour market in the concept of the natural rate of unemployment that is a central focus of mainstream theory.

The ‘neutral rate of interest’ concept is derived from Knut Wicksell. In his classic book – Interest and Prices – he defined the “natural interest rate” as follows (page 102):

There is a certain rate of interest on loans which is neutral in respect to commodity prices, and tend neither to raise nor to lower them. This is necessarily the same as the rate of interest which would be determined by supply and demand if no use were made of money and all lending were effected in the form of real capital goods.

So consistent with the view held in those times that the loanable funds market brought savers together with investors, the natural rate of interest is that rate where the real demand for investment funds equals the real supply of savings.

This remains a core concept in New Keynesian macroeconomics.

In this view, when the money interest rate is below the natural rate, investment exceeds saving and aggregate demand exceeds aggregate supply. Bank loans create new money to finance the investment gap and inflation results (and vice versa, for money interest rates above the natural rate).

MMT follows on from Marx’s attacks on Say’s Law (Walras’ Law) which considered money to be a veil over the real economy.

It also follows from the attacks from Kalecki and Keynes of the Wicksellian notion.

Keynes wrote in his 1936 – General Theory (Chapter 14, page 189):

… the traditional analysis is faulty because it has failed to isolate correctly the independent variables of the system. Saving and Investment are the determinates of the system, not the determinants. They are the twin results of the system’s determinants … [aggregate demand] … The traditional analysis has been aware that saving depends on income but it has overlooked the fact that income depends on investment, in such fashion that, when investment changes, income must necessarily change in just that degree which is necessary to make the change in saving equal to the change in investment.

In other words, the orthodox position that the interest rate somehow balances investment and saving and that investment requires a prior pool of saving are both incorrect.

The reality is that investment brings forth its own saving through income adjustments.

And empirical work trying to link shifts in interest rates with changes in economic activity finds only weak connections.

The 2004 US Federal Reserve Bank Kansas City paper – Estimating equilibrium real interest rates in real time – concluded that “the link between trend growth and the equilibrium real rate is shown to be quite weak.”

Post Keynesians have long held that the link between interest rate changes and capital formation is weak and that monetary policy is not an effective tool for counter-stabilisation.

MMT builds on that view.

Investment decisions are, in the words of Keynes, dependent on the “state of long-term expectation” because it is a forward-looking process, where firms form guesses about what the state of aggregate demand will be in the years to come.

It is necessarily such because the process of creating new capital stock is lengthy and involves a number of separate decisions – type of product to produce, nature of capital required to produce it, design, access supply and ordering, and quantum – are all separated in time.

The investment spending today is the result of decisions taken in some past periods about what the state of the world will be today and into the future. Investment spending is not a tap that is turned on or off when current interest rates change.

Firms are continually making guesses about the future in terms of what the overall state of demand for their products will be, what they are likely to receive by way of revenue if their sales match these expectations, and what it will cost them to produce the output necessary to meet this demand.

Firms also have various choices about what products to produce and how they can produce them (for example, choice of technique).

Firms are driven by the desire to make profit and will thus make choices among different types of productive equipment on the basis of which will contribute the most profit subject to a range of other considerations, many of which are subjective.

For example, a firm that wishes to keep good standing in the community will probably eschew the use of equipment that is damaging to the local environment even if the use was legal and generated more profits than other options.

Whether firms use retained profits to fund future investment or seek funds from the markets there is a cost involved in purchasing new capital.

A firm may have retained earnings to invest. It has the choice of investing them in new plant and equipment, or perhaps, purchasing financial assets which yield a positive rate of return (for example, a bond).

While the firm will be driven by the need to stay in its present business and therefore defend its market share, which means it will usually want to use the funds available to it to purchase best practice, productive infrastructure; it may, at times, hold off from upgrading its productive capital if the circumstances are not conducive.

Investment decisions will thus depend on whether the productive asset being purchased delivers a positive return above the cost.

While business investment is no doubt cost sensitive, what the mainstream economists usually ignore is the fact that expectations of earnings are also important as are assymetries across the cycle.

The cyclical asymmetries in investment spending arise because investment in new capital stock usually requires firms to make large irreversible capital outlays.

Capital is not a piece of putty (as it is depicted in the mainstream economics textbooks that the students use in universities) that can be remoulded in whatever configuration that might be appropriate (that is, different types of machines and equipment).

Once the firm has made a large-scale investment in a new technology they will be stuck with it for some period.

In an environment of endemic uncertainty, firms become cautious in times of pessimism and employ broad safety margins when deciding how much investment they will spend.

Accordingly, they form expectations of future profitability by considering the current capacity utilisation rate against their normal usage.

They will only invest when capacity utilisation, exceeds its normal level. So investment varies with capacity utilisation within bounds and therefore productive capacity grows at rate which is bounded from below and above.

The asymmetric investment behaviour thus generates asymmetries in capacity growth because productive capacity only grows when there is a shortage of capacity.

This insight has major implications for the way in which economies recover and the necessity for strong fiscal support when a deep recession is encountered.

These dynamics are covered in my 2008 book with Joan Muysken – Full Employment abandoned.

The simple investment model, which says that rising market rates of interest lead to lower total investment is also based on an assumption that all other things are equal.

But, in a growing economy, it is likely that aggregate demand conditions will improve at times when the market rate of interest rises. The former will improve the revenue cash flows over time and increase the profitability for each project.

In other words, we would not observe investment falling when the market rate of interest rose because the internal rate of return of each project could also be increasing.

Alternatively, when the economy is in recession, entrepreneurs become pessimistic and this negatively impacts on their assessment of the future returns from different projects.

Further, with substantial excess productive capacity firms are unlikely to expand the capital stock even if new investment projects become cheaper as the central bank cuts the market interest rate to stimulate demand.

The extreme optimism that typically accompanies a boom also would reduce the sensitivity of investment to changes in the market rate of interest. With expected returns high, firms will be prepared to pay higher borrowing costs.

In general, MMT considers monetary policy – the act of varying interest rates – to be an ineffective means for managing aggregate spending.

It is indirect, blunt and relies on uncertain distributional behaviour.

It works with a lag if at all and imposes penalties on regions and cohorts that may not be contributing to the price pressures.

There is also no strong empirical research to tell us about the impact on debtors and creditors and their spending patterns. It is assumed implicitly that borrowers have higher consumption propensities than lenders but that hasn’t been definitively determined.

MMT considers fiscal policy to be powerful because it is direct and can create or destroy net financial assets in the non-government sector with certainty. It also does not rely on any distributional assumptions being made.

MMT also considers that in most cases, fiscal deficits will be the norm to offset the spending drain from the non-government sector (via household saving, corporate saving and/or external deficits).

We also know that fiscal deficits add to bank reserves and create system-wide reserve surpluses.

The excess reserves then stimulate competition in the interbank market between banks who are seeking better returns unless there is a support rate offered by the central bank.

The interbank competition cannot eliminate the system-wide surplus (all transactions net to zero), so, without a support rate for the excess reserves, the overnight rate will fall to zero.

Thus, in pursuit of the desired policy goal of full employment, fiscal policy will have the side effect of driving short-term interest rates to zero. It is in that sense that MMT considers the zero rate to be the norm.

If the central bank wants a positive short-term interest rate for whatever reason then it has to either offer a return on excess reserves or drain them via bond sales.

An MMT understanding does not lead to support for either strategy.

Further reading:

1. Investment and interest rates (August 10, 2012).

2. The natural rate of interest is zero! (August 30, 2009).

3. Why investment expenditure is insensitive to monetary policy (June 22, 2015).

4. Monetary policy is largely ineffective (April 8, 2015).


Is this fixed rate the nominal rate? Would it be sensible to maintain interest rates fixed (at zero or any level) if there was accelerating inflation due to excessive spending on capital formation?

The central bank adjusts the nominal rate of interest and the real equivalent is then determined by the inflation rate.

MMT advocates a macroeconomic state of full employment and price stabilit, which means that the real interest rate will largely be stable and set by whatever policy rate the central bank chooses to target.

Consistent with the view that monetary policy is ineffective, MMT proposes to use fiscal policy, employment buffer stocks (the Job Guarantee) and other policy tools (regulation, procurement policies, etc) to achieve price stability and discipline inflationary spirals.

MMT considers that all spending components – household consumption, business investment, export demand and government spending – carry an inflation risk.

So, as an example, if growth in private capital formation (investment) was running at such a rate that the government felt it was pushing nominal demand ahead of the real capacity of the economy to absorb it, then clearly, the government has a choice to make.

Cut back other components of spending or target lower rates of investment. In the case of investment, many projects are of a large-scale, infrastructure type and usually have to gain planning and other approvals from authorities before they can proceed.

In an inflationary environment, such processes could be staggered.

The point is that MMT economists consider there are much more effective ways of ensuring nominal demand in the economy keeps pace with real capacity than trying to hike interest rates with all the uncertainty that that process brings.

Further, MMT economists point out that it is not clear that rising interest rates are anti-inflationary. Given they boost incomes for a range of asset holders, they increase spending capacity. They also increase costs for firms exposed to the changes, which may provide further impetus for price rises.

Further reading:

1. Building bank reserves is not inflationary (December 14, 2009).

2. Printing money does not cause inflation (March 17, 2011).

3. Modern monetary theory and inflation – Part 1 (July 7, 2010).

4. Modern monetary theory and inflation – Part 1 (January 6, 2011).


It is my understanding that MMT asserts that the currency issued by government is the government’s IOU, in the sense that it can be used by the non-government sector to extinguish their tax obligations. Does this presume that everyone must have a tax obligation? Are there differences of opinion among the MMT economists about this?

First, we need to be clear that their is an ordering in the pedagogy that MMT economists use to introduce our work to the general public.

In some cases, we use simple conceptual vehicles (heuristics) to begin a discussion with those interested in MMT who have no prior background.

Representative of these heuristics are these blog posts:

1. A simple personal calling card economy (March 31, 2009).

2. Barnaby, better to walk before we run (February 8, 2010).

3. Some neighbours arrive (February 15, 2010).

There is no sense that these ‘models’ can represent reality as we know it. Reality is much more complex and multilayered.

But these heuristics allow us to explore some intrinsic characteristics of the monetary system, the capacity of the currency issuer and the options that such a government might have to advance its policy agenda.

As an example, in a highly simplistic, logical model, we might show how a new currency achieves its status by requiring all people to pay their taxes in that currency and then we show that that capacity doesn’t exist in the non-government sector until the government spends that currency into existence.

So we are able to establish a clear causality that taxes cannot intrinsically fund government spending. In that simplistic world, it is the other way around.

Government spending provides the currency in which the non-government sector can pay its taxes and any outstanding debt that such a government might issue just represents previous fiscal deficits, which haven’t been taxed away yet.

As it stands, that simplistic model serves a purpose.

But it should never be the end of the story. The academic MMT economists certainly don’t hold this sort of reasoning as the definitive MMT statement, even if others might.

The point is that once we layer that simple heuristic with real world institutional insights and reality then the simple heuristic quickly becomes inadequate for analysis.

For example, to say that MMT says that taxes cannot be paid before spending is obviously an incorrect statement on two counts.

First, MMT doesn’t say that beyond our simple heuristic models, which are highly stylised and the assumptions used are transparent and deliberate abstractions of reality.

Second, in the real world, I can walk into a bank and borrow funds to pay my tax obligations without having built up any prior financial assets. Abstract from the financial record I might have had to demonstrate in order to access the loan from the bank.

But it is clear, in that instances, taxes can be paid without government’s spending the money into existence first. That is because there are real world institutions such as commercial banks that create deposits when they make loans, and which are absent from the simple heuristic models.

This doesn’t invalidate the insights in the simple models. It just adds layers of complexity that have to be augmented with deeper insights.

In a pedagogical sense, we need to walk before we run. So the simple heuristic models allow us to start thinking in terms of MMT concepts – currency-issuance, government/non-government, flows and stocks, income and wealth, etc – which then allow us to make the next steps as we layer the analysis with more real world complexity.

But hanging onto the simple logic and denying the real world complexity is a dangerous strategy and not one that the academic MMT economists adopt.

In this specific tax payments case, how we extend the complexity of understanding is to note that while it is obvious that banks can create deposits (and liqudity) everytime they create a loan, the transactions associated with that loan (in this case, me paying my taxes) have to ‘clear’. The funds have to come from somewhere.

And that then takes us into a deeper analysis of the role of bank reserves and central bank funds. We then note that ultimately, claims on that deposit at my bank, must be backed by reserves, which is a different to to saying that the loan was made possible by the prior existence of reserves.

But clearly, when I tell the government I am paying my taxes and transfer funds from the deposit the bank has created as part of my loan, the government instructs the central bank to debit the reserve accounts of the bank in question and credit its own account with the amount of the tax payment.

If the bank in question has insufficient reserves or there are insufficient reserves within the banking system at that time, then the only place those reserves can come from is the central bank (which in MMT is considered to be part of the consolidated government sector).

In that sense, the correct statement is not that taxation requires prior spending but that the solvency of the non-government financial system ultimately rests on government making loans to the non-government sector in the currency that the government issues and that these loans allow the banks to always meet the demands on them for bank reserves.

Now, it is clear that not everyone who uses (and demands) the currency pays taxes, as the question notes.

But, the tax-driven currency argument that underpins MMT reasoning does not require everyone to be ‘taxpayers’. Once a currency is established then their are many reasons why it becomes broadly acceptable to the population, not the least being that transaction costs are lower if everyone uses the same currency.

The way in which MMT represents taxation is also rather simplistic. In our simple heuristics, it appears as a lump sum that everyone has to pay (although we represent it as a total non-government sum to simplify matters).

We can clearly introduce complexity into the tax system, with progression in the income tax structure, an array of non-income taxes (such as GST or VAT), and other complexities (death duties, wealth taxes, expenditure taxes, etc).

That has never been a necessity in my view, although I acknowledge that a government has to contend with those complexities when it is operating the tax system in the real world.

But introducing such complexity will not alter the fundamental insight that if you require a significant proportion of the population to extinguish their tax liabilities in the currency that only the government issues then that will elicit a demand for that currency, irrespective of whether you can get that currency by working for the government, working on contracts paid for by the government, or borrowing that ‘currency’ from commercial banks who have reserve accounts at the central bank denominated in that currency, or from other financial institutions that ultimately have to work through banks that have such reserve accounts.

Further reading:

1. Deficit spending 101 – Part 1 (February 21, 2009).

2. Deficit spending 101 – Part 2 (February 23, 2009).

3. Deficit spending 101 – Part 3 (March 2, 2009).

4. Will we really pay higher taxes? (April 7, 2009).

5. Taxpayers do not fund anything (April 19, 2010).


I will continue to answer the questions in Part 2.

Today, I am Kyoto, Japan, for the second event in this week-long speaking Tour. I am speaking at a Rose Mark Campaign workshop today at the Kyoto City International Foundation House.

Tomorrow, I will be speaking in Tokyo.

It has been a great trip so far and I have met some really nice people, all committed to ending austerity and the neoliberal hold on economic policy.

That is enough for today!

(c) Copyright 2019 William Mitchell. All Rights Reserved.

What is the problem with rising dependency ratios in Japan – Part 2?

Published by Anonymous (not verified) on Tue, 29/10/2019 - 12:14pm in



This is Part 2 of my blog posts on population shifts in Japan. In – What is the problem with rising dependency ratios in Japan – Part 1? (October 28, 2019) – we considered the evolution of dependency ratios in Japan as a precursor to considering the nature of problems that accompany a rising dependency ratio. The purpose is to disabuse the public debate of the idea that rising dependency ratios constitute a fiscal crisis and point to the increasing prospect of fiscal insolvency. That erroneous assertion has been used as one of the justifications for pursuing austerity policies, which damage growth, cause rising unemployment and generally miss the point. The problem with this construction is that the solution adopted by the ‘sound finance’ lobby (austerity) to their ‘non problem’ only serves to exacerbate the real problem. Today, we will consider the productivity challenge that lies at the heart of the issues a nation with a rising dependency ratio will face.

Population shift in Japan

I meant to insert these population pyramids in yesterday’s blog post (Part 1) to provide a graphical indication of the shifting population over a century (using UN estimates out to 2050).

The three graphs are for the actual population distribution as at 1950, 2015 and then the projected population in 2050.

For those not familiar with these histogram depictions, we gauge the speed of population growth by the shape (rectangular or more pyramid) of the graph.

When the graph becomes rectangular, the population is growing slowly relative to the 1950’s shape. That is, the older cohorts are being replaced by younger cohorts at around the same pace.

Youth dependency ratios that are derived from this data can be high when the graphs are highly pyramidic in nature. It means that a larger proportion of the population are in or approaching their ‘fertile’ or reproductive period but will soon be productive workers.

This is a different situation when the Aged dependency ratio is high.



Projected 2050

The productivity challenge

In – What is the problem with rising dependency ratios in Japan – Part 1? – I concluded by asserting that the problem of rising dependency ratios (however measured) were two fold:

1. Ensuring that all available productive resources are fully utilised. There is no point screaming about a rising dependency ratio if we tolerate our government’s choosing to waste what resources that are available and willing to work (or be put to work in the case of capital).

2. Productivity.

In the second case, the challenge is simple.

If there are increasingly more people dependent on access for goods and services and increasingly less people producing those goods and services then the latter cohort has to be more productive than before or material standards of living will fall, independent of whether real resources are available or not.

Productivity rises when a nation gains more output per unit of input.

That, ultimately becomes the real challenge of the ageing society once the politics is sorted out to ensure we provide job opportunities and hours of work for those who desire to work.

As I noted in Part 1, constructing the ageing society problem in terms of a challenge of government solvency (the ‘non-problem’) is not only based on erroneous reasoning and a misunderstanding of the capacities of the currency-issuing sovereign, but, also, can lead to policies that actually undermine the capacity of the society to meet the actual problem – maintaining full employment and adequate productivity growth.

Many nations have adopted an austerity bias as the neoliberal era unfolded and have seen output rates decline and productivity growth stagnate as a result of suppressed investment in productive capital, reduced skill development and declining scope and quality of public infrastructure.

It is all related.

To advance productivity, investment is required in human capital and physical capital including public infrastructure. Starving a nation of that sort of investment is the fastest way to undermine material living standards in the future as society ages.

I will return to desirable policy development presently.

But I was curious as to how Japan had fared in relation to productivity as its dependency ratio has been rising. I was also curious to compare this performance to the US, which has a much lower but rising dependency ratio.

The following graph shows the ratio of real GDP (output) to the working age population in Japan – which is one way of expressing productivity – from 1990 to 2018 (with the index set at 100 in 1990).

Clearly, once we understand the concept of an effective dependency ratio, we would qualify the use of the denominator (to use the subset of the working age population that is actually working).

Japan’s population is declining and ageing as a result of the low birth rates and low net migration.

Its labour force participation rate has also declined. For example, in 1953 it was 70 per cent. By 2018, it had fallen to 61.5 per cent.

I will come back to the participation question presently.

In terms of the first graph, one can conclude that despite the working age population declining somewhat over this period from 87,035 thousand in 1994 to 75,451 thousand in 2018, productivity per person has risen significantly with two notable periods of stagnation or decline.

The first period of decline in the early 1990s was related to the massive commercial property collapse that occurred in 1991 and shook the foundations of the Japanese economy.

The second period of decline and stagnation was following the sales tax hike in 1997, which derailed growth.

In 1996, the economy was showing strong signs of recovery after the disastrous property bubble burst in the early 1990s.

Real GDP growth on an annualised basis was gathering pace in 1996 – March-quarter 2.9 per cent, June-quarter 2.5 per cent, September-quarter 1.8 per cent, then December-quarter 3.4 per cent, sustained into March-quarter 1997 3.3 per cent.

There was strong growth in private business investment and housing construction.

Then, under pressure from fiscal conservatives who claimed Japan would become insolvent, the Japanese government hiked sales taxes from 3 per cent to 5 per cent in April 1997.

And what happened? The bottom fell out.

At the time, the neo-liberals claimed the tax hike had nothing to do with the prolonged recession that followed – 7 negative quarters of growth in the next two years – which also entrenched the damaging deflation that Japan has had to face.

The claims were that the Asian financial crisis were to blame. But a closer examination of Japan’s export performance at the time categorically discredits that claim. The net exports deficit fell over the period of the recession, mostly due to a collapse in imports as the domestic economy waned.

This period of recession really blunted capital investment and productivity growth slumped.

See these blog posts (and links to earlier posts within) for a discussion of the sales tax disaster:

1. Japan about to walk the plank – again (September 30, 2019).

2. Japan is different, right? Wrong! Fiscal policy works (August 15, 2017).

In April 2014, the Abe government raised the sales tax from 5 per cent to 8 per cent.

The third period of decline is, of course, the GFC.

But the significant fact is that if we compute the average annual growth rate in this series for the period 1990 (just before the property collapse) to 2018, we find it was 1.9 per cent per annum.

That is hardly a stagnating outcome and suggests that Japan is handling its ageing workforce fairly deftly (in material terms).

But here is a surprise. The next graph compares Japan’s experience in this respect with the US over the same period (1990 to 2018).

One society is meant to be collapsing from the burden of ageing while the other is the powerhouse of innovation!

Further, the average annual productivity growth rate for the US for the period 1990 to 2018, was 1.5 per cent per annum.

That is, considerably lower than Japan, which has accelerated ahead of the US in productivity growth (as measured) since the GFC.

Labour force participation

As noted above, as well as facing an ageing population, participation rates have dropped in Japan over the last several decades.

In 1953 it was 70 per cent. By 2018, it had fallen to 61.5 per cent.

In terms of the 2018 working age population (15 years and over), which was 111,010,000, that drop in participation amounts to that amounts to an extra 9,435,850 workers that would be available for work had not the participation rate fell.

Part of the participation issue is the almost constant and low involvement in the active labour force by females in Japan.

The following two graphs tell the empirical story.

The first compares the Japanese aggregate participation rate with that of Australia, which also faces an ageing society issue, although not as profound as that of Japan.

The participation rate in Japan fell steadily over the 1990s but since the GFC there has been a noted rise, mostly due to increased female participation.

Australia has shown a different pattern of steadily rising participation with noted cyclical slumps.

The difference between the two labour markets in this respect is significant. There is much more unused productive capacity in the Japanese labour market than in the Australian case, despite the higher rates of labour wastage of the existing labour force in Australia.

The second graph shows the evolution of the male and female participation rates for Japan and Australia. While the Australian female participation rate has been steadily rising since the 1970s, it is only in recent years has there been any significant upward movement in the female rate for Japan.

Policy strategies

One has to be cautious when discussing specific policy options for a nation because historical and cultural differences can become important in determining the legitimacy in a democratic sense of difference options. What might be suitable for one nation may not be acceptable elsewhere.

In terms of the productivity challenge, for all practical purposes there is no real investment that can be made today that will remain useful 50 years from now apart from education.

Ensuring high levels of participation in education, creating effective school-to-work transitions with appropriate training ladders, and ensuring the macroeconomic climate is such that there are sufficient jobs should be the policy priority.

Apart from the investment in people, productivity growth comes from investments in research and development, not the least part, in universities and other research institutions.

Increasing labour force participation by older workers (and in Japan females) is sound but requires the government ensure there are productive employment opportunities available.

Running an austerity policy stance in the erroneous belief that the government has to ‘save’ money to fund future health care and pension demands, which reduces employment growth, but, at the same, time coercing older cohorts (or females) into higher levels of labour force participation is the worst combination of policies.

It is self-defeating and punitive.

Anything that has a positive impact on the dependency ratio is desirable and the best thing for that is ensuring that there is a job available for all those who desire to work.

Further encouraging increased casualisation and allowing underemployment to rise is not a sensible strategy for the future. The incentive to invest in one’s human capital is reduced if people expect to have part-time work opportunities increasingly made available to them.

But all these issues are really about political choices rather than government finances.

The ability of government to provide necessary goods and services to the non-government sector, in particular, those goods that the private sector may under-provide is independent of government finance.

The reality is that fiscal drag that accompanies austerity reduces growth in aggregate demand and private disposable incomes, which can be measured by the foregone output that results.

Clearly surpluses help control inflation because they act as a deflationary force relying on sustained excess capacity and unemployment to keep prices under control.

A number of policies have been implemented in Japan or proposed to address the ageing population issue.

In December 1994, the Government introduced the – Angel Plan – which ran from fiscal year 1995 to 1999 and was an attempt to increase the birth rate and female participation through childcare support measures.

In December 1999, the ‘New Angel Plan’ was introduced to cover the next five year. This plan continued the investment in childcare, and added housing initiatives for better family accommodation as well as subsidised education.

A series of policy interventions followed: the 2003 “Act on Advancement of Measures to Support Raising Next-Generation Children”, the 2003 “Basic Act for Measures to Cope with Society with Declining Birthrate”, the 2004 “Child-rearing Support Plan”, the 2006 “New Measures for Declining Birthrate”, the 2007 ““Key Strategies” initiative – all aimed to improve the birth rate and make it easier for families to exapand and for women to combine work and family responsibilities.

In more recent period, the emphasis on increased female labour force participation has strengthened with various plans aimed at making it easier for women to combine child rearing and work.

Other policies include the “Formulation of Comprehensive After-School Plan for Children” (from July 2014) to improve child care facilities; “Efforts for Regional Revitalization” (from September 2014) to increasing youth employment opportunities outside of Tokyo and to generally promote activity in regional centres; the “New Outline of Measures for Society with Declining Birthrate” (from March 2015) which continues to provide incentives for child birth, helping families cope with more children, reducing mens’ working hours etc.

The Japanese government has identified five important areas of policy development in this context:

1. “Further improvement of childrearing support measures”.

2. “Realisation of young people’s hopes for marriage and childbirth”.

3. “Consideration to multiple child families”.

4. “Changing the way of working of men and women”.

5. Reinforcement of measures according to regional situations”.

All of these policies are sound and will help to change the existing practices.

Unfortunately, the Japanese government has also fallen prey to the erroneous fiscal crisis narrative.

The question of labour market dualism in Japan is also raised in this context.

What is it? Why does it matter?

In the Japanese context, dualism refers to “the separation between regular and non-regular employment” (OECD reference that follows).

The rising proportion of non-regular jobs – casualised, low or irregular pay, with little promotional prospects or security – provide no incentives to an individual or firms to invest in human or physical capital, which is essential for increasing future productivity growth.

In this government document (published September 2018) – Abenomics: For future growth, for future generations, and for a future Japan – we learn that the Government aims to use its legislative authority to introduce “equal pay for equal work” and to:

Eliminate the irrational gaps in the working conditions between regular and non-regular workers in order to enable non-regular workers to be fairly evaluated and to work with higher motivation

On December 20, 2018, the OECD published – Working Better with Age: Japan (Executive Summary and Recommendations) – which notes that one of the obstacles for increasing employed participation of older workers is the fact that such workers (after formal retirement):

… often face large wage cuts even when re-hired, usually as non-regular workers, and their skills may be underutilised. This can undermine their productivity and well-being.

At the same time, there has been a trend increase in non-regular jobs, with close to two- fifth of the Japanese workforce employed in non-regular positions in 2018, up from less than one-fifth two decades ago. This has meant that many workers find themselves in irregular jobs that are typically paid less than full-time regular employees, offer limited access to training and lack proper social security protection. Consequently , their employability is weakened in terms of opportunities for career progression and to remain longer in employment at an older age as well as undermining their old-age pension entitlements.

A ‘race-to-the-bottom’ strategy, which is characteristic of the neoliberal era to shift power into the hands of capital is the opposite of a strategy to achieve a high-pay, high productivity economy.

The OECD note that “By international standards, the quality of working conditions as measured by job strain (the difference between job demands and job resources) is poor on average in Japan compared with some other advanced OECD countries.”

They point to “excessive work hours”, “a lack of autonomy and support from colleagues” and other negatives which deter “some older people from working longer and may be preventing some women, especially mothers, from entering employment at younger ages and pursuing longer work careers.”

One of the positive steps the Government can take is to increase the labour force participation of women, which means there have be better prospects for re-entry into the workforce after child birth.

The OECD report that “Far more Japanese women than men work in non-regular jobs” and that:

Many women who leave the labour market to have children find they can return only to a non-regular job, with a junior, part-time position.

Reform is needed to ensure that women do not feel disadvantaged in future labour market involvement by decisions to have children.

In this regard, the policies that the Japanese government has introduced (for example, the 2004 ‘Stabilisation of Employment of Older Persons’), which aim to extend the working lives of older workers have not been successful because while they have increased employment of this cohort per se, the firms have responded by cutting wages and other entitlements for workers once they reach the mandatory retirement age.

To address this problem, increases in the mandatory retirement age is necessary, but then as noted in Part 1, this introduces inequities across the occupational distribution with manual workers facing a disadvantage due to the physical strain of their jobs.

So there has to be a suite of policies to:

1. Extend the compulsory retirement age, which will eliminate the threshold that employers use to renegotiate wage cutting contracts for workers who wish to continue working.

2. Ensure that wages and conditions are retained into older age with existing or new employers.

3. Provide just transitions for manual workers disadvantaged by the extended compulsory retirement age.

The OECD recommend eliminating the dualism by attacking the conditions of workers in regular work (reducing job protection etc). This is not a sensible strategy as the internal labour market system where workers enjoy seniority etc (so-called ‘implicit contracts’) has been found by numerous studies to increase productivity not undermine it.

The emphasis should be on improving the lot of non-regular workers rather than tearing down the conditions for regular workers.

The research literature is clear – healthier workers can work longer at higher levels of attainment.

It also shows that higher income workers can work longer.

Governments can influence the health of populations in significant ways – reducing contagious illnesses through free innoculations, especially illnesses that have disproportionate impacts on older workers, such as shingles, flu, pneumonia, etc);
improving nutrition, diets and exercise through national campaigns, and reducing alcohol and substance abuse including tobacco, among other initiatives.

The so-called ‘cost’ in financial terms of such initiatives are irrelevant for a currency-issuing government. The only consideration is not to waste real resources, which means that interventions should be as effective as possible.

The Downside

Unfortunately, the Japanese government has also fallen prey to the erroneous fiscal crisis narrative.

The recent increase in the consumption tax is an expression of this and will work against the sensible initiatives it has put in place because it will damage economic growth and reduce employment opportunities.

The erroneous fiscal narrative is also evident in the changes that the Government is making to the eligible ages for pension entitlement.

I will leave that for another day.


I will be in Japan later this week to discuss these issues and others.

That is enough for today!

(c) Copyright 2019 William Mitchell. All Rights Reserved.